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Home Equity Line of Credit

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Ruben Garcia Mortgage Group - Home Equity Line of Credit

What is Home Equity?

A home equity line of credit, more commonly referred to as a HELOC, is a line of credit secured by your home (the equity of your home to be exact) that gives you a revolving credit line to use for large expenses, to consolidate higher-interest rate debt (such as credit cards or personal loans), or for those unexpected things that life throws at you. A HELOC often has a lower interest rate than some other common types of loans, and the interest may be tax-deductible. It is always wise to consult with your CPA or tax advisor to see how a HELOC can benefit you.

How does a HELOC work?

With a HELOC, you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. This can vary significantly from person to person. Many factors get taken into consideration when a lender underwrites a HELOC. As you repay your outstanding balance, the amount of available credit is replenished – think if like a credit card. This means you can borrow against it over and over again if you need to, and you can borrow as little or as much as you need throughout your draw period (10 years) up to the credit limit you establish at closing (again this amount varies by person to person). At the end of the draw period, the repayment period (typically 20 years) begins. Please note you can always refinance your HELOC again to restart the 10-year draw period (restrictions do apply).

How does one qualify for a Home Equity Line of Credit?

To qualify for a HELOC, you need to have available equity in your home. This means that the amount you owe on your home must be less than the value of your home. The excess amount is known as equity (basically money that belongs to you, the homeowner). You can typically borrow up to 85% of the value of your home minus the amount you owe. In some case, you can borrower up 90% of the value of your home (there are additional guidelines to meet). Also, a lender generally looks at your credit score and history, employment history, monthly income, and monthly debts, just as when you first got your mortgage. However, unlike your first mortgage on your home, home equity lines of credit can typically be done in under 10 days.

Why is the rate variable and not fixed?

When you have a variable interest rate on your home equity line of credit, the rate can change from month to month. The variable rate is calculated from both an index and a margin. Not all lines of credit are created equal. Shop around for the best loan option for you.

An index is a financial indicator used by banks to set rates on many consumer loan products. Most banks use the U.S. Prime Rate as published in The Wall Street Journal as the index for HELOCs. The index, and consequently the HELOC interest rate, can move up or down. The prime rate is one of the steadiest rates in the market, even when it goes up and down, the changes are done in small increments.

The other component of a variable interest rate is a margin, which is added to the index. The margin is constant throughout the life of the line of credit. The margin is set by the lender doing the loan.

As you withdraw money from your HELOC, you’ll receive monthly bills with a minimum payment that will usually be calculated as an interest-only payment. Payments may change based on your balance and interest rate fluctuations and may also change if you make additional principal payments. Making additional principal payments when you can help you save on the interest you’re charged and help you reduce your overall debt more quickly.

Just like a credit card, HELOC’s are open-ended. This means you can borrower against it, pay it back and then borrower again. This is the reason why the interest rate is variable.

Fixed interest rate option

Some lenders offer an option that allows you to convert a portion of the outstanding variable-rate balance on your HELOC to a fixed rate. Payments you make on a balance at a fixed interest rate are predictable and stable and can protect you from rising interest rates. However, once you pay this balance down or pay it completely off, you will not be able to borrower against it anymore.

 

Still unsure of what option is best for you?
Give us a call, we’d be happy to share some knowledge and insight that will hopefully facilitate your decision

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20%

1%

4.375%

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Want a Copy of the Results?

$1421

Monthly Payment

Principal & Interest $1421

Monthly Taxes $1421

Monthly HOA $1421

Monthly Insurance $1421

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