Skip to main content

HELOC: The Purpose and Uses of a Home Equity Line of Credit

HELOC: The Purpose and Uses of a Home Equity Line of Credit

In the US, around 63% of the mortgaged homes now have a combined amount of $8.956 trillion in equity. If you are a homeowner, you may believe that this equity has been locked away. However, did you know it is possible to utilize it in a loan?

Acting like a second mortgage, a HELOC can be a great alternative method of lending. Read on as we explain everything you need to know about a HELOC. 

What Is a HELOC?

A HELOC is a home equity line of credit. It acts in a similar way to a credit card, giving the lender a set amount to use at their discretion. Payments get made back over set periods, and HELOCs are subject to much lower interest rates than other credit loans. 

The borrowing is done against the equity in your primary residence. This is the value of the home minus the amount you owe on the mortgage. Borrowing against the equity in the home can often yield very good rates. 

How Much Can You Loan With a HELOC?

The amount you can loan depends on the equity in your primary mortgage. This does not mean lenders will give you a HELOC for the full amount. Your credit score, debt-to-income ratio, and income are also factored into this. 

These factors also come into the equation when qualifying for a loan. As it is essentially a second mortgage, the same qualifying factors set the terms. If you are deemed risky, you may get a loan offer below 80% of the value of equity. 

Benefits of a HELOC

Once you get a HELOC, they are extremely flexible. They let you borrow as and when you want. This can be great for doing home renovations, investing in property, or sudden large expenditures like college tuition. 

Many HELOCs have lower closing costs than other types of loans. While they act like credit cards, you will find they have much lower rates of interest. 

What Are the Loan Requirements?

Loan requirements will differ depending on the lender. However, you will generally need a debt-to-income ratio of 40% or less with a credit score of 620 or higher. The home value must also be 15% more than you own. 

Draw and Repayments

The process of borrowing from a HELOC has two parts known as the draw and repayment periods. The draw period will have a time limit, for example, 10 years. During this time you can withdraw funds and pay them back using interest-only payments. 

Once the draw period ends, you can not loan any more money. The repayment period may last another 20 years. During this time, the loan gets paid back with added interest, making the payments in this period quite high. 

Therefore, if you do take out a HELOC, you must budget appropriately. It can be a big difference between small draw period payments to the second half. 

Getting a HELOC

Now that you know all about a HELOC, begin to shop around. You will find many lenders who offer them. Make sure you have equity in your home and get the best loan terms possible. 

If you are planning on using it to fund a new property or development, Allegiant Management Group can help. Serving Kissimmee, Florida, we can create a property management package tailored to your needs. Contact us here and get started today. 

back