A home equity line of credit (HELOC) is a type of lending tool that lets property owners borrow against their home’s value for a wide range of needs. 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 by property owners. For those who need to consolidate debt, remodel their home, or just extend their available credit, a HELOC can work very well.
To find out if a HELOC is the right option for your needs, take a closer look at the details here. Learn what a HELOC is and how much you can borrow using this type of financial tool.
What is a HELOC?
A HELOC is a type of equity-based loan. 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 on it, 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.
The purpose of this type of loan is very flexible. You can use it for many things, including refinancing other debt, paying for a trip, covering the down payment on another 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.
How does a HELOC work?
A HELOC is based on the available equity in your home. The first step is to determine what your home is worth. From there, your lender will help to structure a loan that offers the support you need based on several factors.
Typically, you will have a credit limit or the maximum amount you can borrow. This is called the draw limit. For example, you may have a HELOC with limit of $50,000, which means you have that amount you can borrow from over the draw period.
During the lifetime of the loan – the draw period and beyond, you will make monthly payments on the loan.
Many people will tap into a HELOC and draw the full balance initially. They then work to pay that down with monthly payments (and paying it off early) and then borrow from it again. However, you can open a HELOC and not pull out the full amount if you do not need it right away.
Also note that HELOCs typically have interest rates that are competitively low, much like mortgage rates. That is because this is a secured asset. Your home’s value is tied to it. That also means that if you default on the loan, the lender could pursue your home to repay the debt.
Determining Your Maximum HELOC Amount
How much HELOC can I get?
There are many factors to think about when it comes to tapping into the value of your home. Most importantly, you have to know what your home is worth on the market today. That is not the same appraised value as what you paid for it when you purchased it, but rather closer to what you could expect if you sold it today. You may need to have an appraisal done to determine this.
The next consideration is how much the lender is willing to lend to you up to the value of the home. Typically, a loan cannot be more than the market value of the home minus any type of mortgage currently in place. To determine this, subtract the current balance on your existing mortgage and any other liens against the property, from the market value of your home. That’s how much equity you have.
Some lenders will cap the amount you can borrow via second mortgage at up to 80 or 90% of the home’s value. However, Island Federal offers a unique product that lets you borrow as much as 100% of the home’s value. That means you gain access to more of the funding you need.
Factors Affecting HELOC Amount
There are numerous factors that impact how much you can borrow from a HELOC. Ultimately, when you meet with your lender for a quote, you will get a better level of insight into this. However, consider the following insights into how to get HELOC values.
Like many other loans, your credit score plays a role in whether you can obtain a HELOC and how much you can borrow. Lenders set the rules on what type of credit score they accept as well as what interest rate they charge based on creditworthiness. Those who have a high credit score have a proven ability to manage credit, and that typically means that they are likely to be able to make payments on time.
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 look at the loan to value ratio and the monthly payment, and the higher the interest score, the higher this payment is. As a result, you may be able to borrow more with a higher score because your payment will be less.
The current interest rate is always a factor when it comes to borrowing. Like a savings account or money market account, interest rates on home equity loans will fluctuate over time..Not all lenders charge the same rate, which is why it is a good idea to compare several to find one that is most affordable to you. The lower the interest rates are, the more you can borrow because your monthly payment will be lower.
Also, note that both a fixed rate and variable interest rates are available for home . Fixed rates have the same rate throughout the lifetime of the loan, which means your payment stays the same. With a variable rate, that loan payment can change as the interest rate fluctuates.
Lenders also take a look at how much debt you have and how much income you have coming in. Your debt-to-income (DTI) ratio is a very important number. It helps lenders to determine how much money you have available each month to pay towards the loan.
To determine what your DTI ratio is, add up all of the monthly debt payments you make. Then, divide that by the gross monthly income you receive. This is the amount of money you earn before all of your taxes are taken out.
Lenders determine what an acceptable DTI is for their needs. The lower your debt is, the more income you have to use for other things, including making your loan payment.
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.
Calculating How Much You Can Borrow
There are a few things you can do to determine how much you can borrow.
HELOC Loan Limits
First, determine what the mortgage lender’s maximum lending limit is. Island Federal offers loans up to 100% of the value of a home, less any outstanding liens or mortgages.
Steps to Estimate Your HELOC Borrowing Power
You can also increase your ability to borrow more by following a few steps:
- Make sure your home appraises well. The higher the value of your home, the better.
- Polish your credit score by making on-time payments and paying down some of your debt.
- Work to pay down your mortgage balance.
Increasing Your HELOC Amount
Improving your credit can help increase the amount you can borrow.
- Make payments on time every time.
- Work to pay down the debt you owe. Keep your balances on all credit cards under 30% of the credit limit or as close to that as possible.
- Make sure you’re using credit. If you don’t have a credit history yet, consider opening a credit card as a first step.
- Work to create a budget to help you minimize credit dependency and to free up some of your income each month.
- Consider adding extra income each month to help stretch your borrowing power.
Is a HELOC a good investment?
The investment in a HELOC can give you the flexibility you need to better manage your finances over time, but it’s always a good idea to get a quote and work with a lender that can help you determine the best home equity product for your needs.
Do you have to have a lot of equity to use a HELOC?
You don’t have to have a lot of equity, but you cannot borrow more than the value of your home when your first mortgage amount is combined with the equity loan.
Finding the Best HELOC Lender
Many financial institutions offer these loans. The key is to find the best HELOC lender for your needs.
Researching HELOC Providers
Learn as much as you can about available HELOC lenders before you invest. Choose one that is reputable, trustworthy, and a local community leader. You also want to consider their loan products, the overall availability of loans, and the terms and conditions they offer.
Comparing HELOC Rates and Terms
Look at the interest rate charged by lenders to determine which is the most affordable. Keep in mind that terms and draw periods can range from 5 to 10 years or longer. You may also wish to use a few online calculators to help you make an informed decision about which loan terms are best suited for your needs.
Reviewing Customer Reviews and Ratings
Take the time to compare lenders based on the reviews and ratings left by previous customers. The more insight you can see about the company’s financial health, how well they work with their clients, and how easy the process is, the better. Google is a great place to find reviews, but also check other 3rd party websites like Yelp.
Without a doubt, borrowing money is often necessary, and with a HELOC, you can borrow at a low interest rate, tapping into the value of your home. As a credit line, you can continue to use it for an extended amount of time, giving you the flexibility to borrow whenever there’s a need.
Understanding HELOC borrowing limits and responsible borrowing is key. Don’t borrow more than you need, and work to pay down your debt faster than owed.
You can learn how to get a HELOC by reaching out to Island Federal Credit Union for personalized assistance and to start the application process. Learn more about our company, our services, including our investment options like IRAs, and the resources we offer to support our clients. Contact us now.