A home equity line of credit (HELOC) is a type of lending tool that allows property owners to borrow against the equity in their home for a variety of purposes. Much like a home equity loan, this type of loan typically offers a lower interest rate than personal loans and may be easier to obtain for property owners. For those who need to consolidate debt, remodel their home or simply extend their available credit, a HELOC can be a very effective solution.
In most cases, you can expect to borrow as much as 80-90% of your combined loan-to-value ratio. Borrowing up to 100% is possible depending on the credit union or bank and a multitude of other factors like home value, existing mortgage balance, etc.
To find out if a HELOC is the right option for your needs, take a closer look at the details here. At Island Federal Credit Union, we offer competitive HELOC options tailored to our Members’ unique situations.
Understanding Home Equity Lines of Credit (HELOCs)
A HELOC is a type of equity-based line of credit. Equity is the value of your home after any mortgage debt is removed. For example, if your home is worth $400,000 and you have a mortgage with a balance of $200,000, you have $200,000 worth of equity. With a HELOC, you may be able to tap into some of that equity to use for just about anything you need.
What makes a HELOC different, though, is that it operates more like a credit card than a one-time disbursed loan. That means you can borrow up to the credit limit, pay it back and then borrow from it again as you need to. Most of the time, the equity line of credit is in place for a set number of years, and you may be able to renew it after that. More specifically, the draw period can be anywhere from 10-15 years and the repayment period 10-20 years. You’ll only pay interest on funds withdrawn, not the entire credit limit.
The purpose of this type of loan is very flexible. You can use it for various purposes, including refinancing other debt, paying for a trip, covering the down payment on a new purchase or any other need. It can also just be available to you as a credit line for emergency situations.
The core benefit of a HELOC is that it gives you the flexibility of having access to revolving credit at a higher value and a draw period that helps you tap into the lower interest rates.
The HELOC Borrowing Formula: Calculate Your Maximum Amount
To determine your potential HELOC borrowing power, use this formula:
- HELOC Borrowing Limit = (Home Value x 0.85) – Current Mortgage Balance
In this formula, you’re assuming you can borrow 85% of your home value, minus any outstanding mortgage balance. At Island Federal, we offer qualified borrowers the opportunity to borrow up to 100% of the market value, less any outstanding liens. Contact us directly for personalized calculations.
Step-by-Step HELOC Calculation Example
Let’s assume your home is valued at $400,000 and you have $150,000 remaining on the mortgage. Using the above formula, your final borrowing amount would be $190,000.
- $190,000 = ($400,000 x .85) – $150,000
Key Factors That Determine Your HELOC Borrowing Limit
Several key factors influence your HELOC borrowing limit, including your home equity, combined loan-to-value ratio, personal credit score, debt-to-income ratio, payment history and income stability. Each factor plays a role in determining your likelihood of approval for a HELOC, as well as the amount you can borrow. At Island Federal, we take a holistic approach to evaluating Member applications.
Home Equity and Appraised Value
Property appraisal plays a crucial role in determining the available home equity by establishing the current market value of the property. Appraisers consider various factors when evaluating a property, including size, location, condition, recent comparable sales in the area, and any unique features or improvements made to the property. A typical appraisal costs anywhere from $300 to $500, and your mortgage lender will explain how that fits into total fees and closing costs.
Credit Score Requirements for HELOCs
Like many other loans, your credit score plays a role in whether you can obtain a HELOC and how much you can borrow. Lenders establish the criteria for the type of credit score they accept, as well as the interest rate they charge based on an individual’s creditworthiness. Individuals with a high credit score have a proven ability to manage their credit effectively, which typically means they are likely to make timely payments.
A higher credit score not only impacts how much you will pay in interest and your ability to borrow, but also how much you will receive. Lenders often consider the loan-to-value ratio and the monthly payment, and the higher the interest score, the higher this payment typically is. As a result, you may be able to borrow more with a higher score because your payment will be less.
Check your credit score before applying for a HELOC to determine if it’s worth addressing before going through the process.
Debt-to-Income Ratio (DTI)
The debt-to-income ratio is the percentage of your monthly gross income allocated to your debt payments. Lenders typically prefer a DTI ratio below 43%, although the lower this figure is, the better your chance of obtaining a higher approved credit limit. DTI is important because lenders want to ensure that you can adequately repay what you borrow.
Income Stability and Payment History
Lenders typically require at least two years of stable income history and a successful track record of on-time mortgage payments. On-time mortgage payments help your credit score and also help ensure your reliability as a borrower.
HELOC vs. Home Equity Loan vs. Cash-Out Refinance
Is HELOC the best borrowing option for you? Other options include a home equity loan or a cash-out refinance. Here’s a look at how they compare:
- Home equity loan: A home equity loan is an installment loan that allows borrowers to receive a lump sum amount. They have fixed interest rates for more predictable and fixed monthly payments.
- Cash-out refinance: A cash-out refinance replaces the existing primary mortgage and is another type of lump sum loan amount. They come with either fixed or variable interest rates.
HELOCs, conversely, are revolving lines of credit with variable interest rates. You’ll repay just interest during the draw period, and then principal and interest during the repayment period. The total HELOC period can last 20 years or more, depending on the terms. HELOCs make the most sense for ongoing projects, while home equity loans are ideal for significant one-time expenses and cash-out refinances are best for improving your interest rate.
At Island Federal, we’ll help put you into the best home equity situation to meet your specific needs.
Smart Uses for Your HELOC Funds
Some ideal uses for HELOC funds include financing ongoing home renovation projects, major repairs or any improvements that are designed to increase your property’s value. We suggest refraining from using HELOC funds on depreciating assets, vacations or everyday expenses. Keep in mind that your home serves as collateral, underscoring the importance of responsible borrowing.
Understanding HELOC Draw and Repayment Periods
There are two distinct phases of HELOC borrowing: the draw period and the repayment period. The draw period lasts 10-15 years and only requires interest-only payments on the borrowed amount. The repayment period lasts approximately 20 years and requires both principal and interest payments.
Monthly payments will significantly increase during the repayment period, so smart budgeting is crucial. You can also pay down principal during the draw period to offset future payment increases.
HELOC Interest Rates and Payment Structure
Unlike home equity loans and cash-out refinances, HELOCs have variable interest rates that can fluctuate based on the market and economic conditions. Some lenders, however, will set a maximum interest rate for the loan, usually around 18%.
Unlock Your Home’s Potential with Island Federal
For more information on HELOC loans, contact Island Federal today. As a leading Long Island credit union, we specialize in offering competitive rates, flexible terms, local expertise and personalized service to our Members to help you make the best decision about home equity based on your situation.
Contact us today to schedule a personalized HELOC consultation and begin your application.
FAQs About HELOC Borrowing Limits
What is the maximum amount I can borrow with a HELOC?
The maximum amount that you can borrow with a HELOC is usually 80 to 90% of your home’s value after its outstanding mortgage balance. However, at Island Federal, we allow qualified borrowers up to 100% of the market value, less any outstanding liens. Contact us today to learn more.
How do I calculate how much HELOC I can get?
To calculate a HELOC, you’ll need to have your home appraised and know your current mortgage balance. You’ll then multiply your home’s appraised value by the maximum loan-to-value ratio, then subtract any outstanding mortgage balance. This should inform you of the maximum amount you can borrow.
Can I borrow 100% of my home equity with a HELOC?
Most lenders only allow you to borrow 80-90% of your home’s value after its outstanding mortgage balance. However, at Island Federal, we offer qualified borrowers the opportunity to borrow up to 100% of the market value, less any outstanding liens.
What credit score do I need to qualify for a HELOC?
While every lender has different requirements, the typical minimum credit score you’ll need is 680.
Does my income affect how much I can borrow with a HELOC?
Yes, this is one of the most important factors lenders weigh when awarding a HELOC. Lenders work to ensure you have sufficient income to repay the loan. The more you earn, the more likely you’ll qualify for a larger line of credit — and vice versa.
Can I use a HELOC calculator to determine my borrowing power?
Yes, a HELOC calculator can help you assess your home’s appraised value, outstanding mortgage balances and the lender’s loan-to-value ratio to help determine an estimate on your potential approved amount.
What happens if my home value increases after I open my HELOC?
If your home value increases, your HELOC credit limit may not automatically increase. If you would like to increase your credit limit, please contact your lender to request a modification or apply for a new HELOC.
Are there minimum and maximum HELOC amounts at Island Federal?
Contact Island Federal to learn more about HELOC loans. The amount you’re approved for is based on your home’s market value, mortgage and your personal financial situation. Every situation is different, but we’re happy to work with all of our Members to put them in the best situation.