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The Ultimate Guide to Home Equity Lines of Credit (HELOC)

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Life can be expensive, and credit cards can be a costly way to pay for things when you don't have the cash saved. One alternative to credit cards is taking out a home equity line of credit, or HELOC, to pay for home remodels, wedding expenses or college tuition for example.

While using a HELOC involves borrowing money against your home's equity, it can be an excellent way to get access to a large sum of money quickly and at a lower interest rate than traditional credit cards.

Let's explore some HELOC basics and what you should consider when shopping for the best deal. We’ll start with a quick overview of what a HELOC is.

HELOCs Defined

A home equity line of credit is a revolving line of credit backed by the equity in your home. That means you can borrow up to a limit, pay it back and then borrow again if needed. You can find your home's equity amount by subtracting its market value from your mortgage balance.

Most financial institutions will let you borrow up to 80% of the home's equity. For example, if your mortgage balance is $100,000 and your home's market value is $400,000, you have $300,000 in equity. In this example, you could borrow up to $240,000.

Terms will vary among borrowers. In general, however, a HELOC begins with a period during which you can borrow from the credit line followed by a term when no more borrowing can be done and repayment begins. For example, you may be allowed to draw on the funds for 10 years. Then the loan freezes, and you will have up to 15 years to pay the balance back.

Applying for a HELOC is like applying for other loans. While a HELOC often requires an appraisal, the process is usually less time-consuming than applying for a mortgage loan. Lenders look for a good credit score, low debt-to-income ratios, job security and a history of on-time payments.

While credit cards and personal loans require high-interest charges, a home equity line can have a relatively low-interest rate. Plus, you are only paying interest on the funds you borrow.

Ways to Use HELOCs

You can use a HELOC for many types of purchases. A common reason to borrow against your home's equity is to cover a significant remodel. A recent report pegged the median cost of kitchen remodels at $40,000. Many families don't have that kind of cash in the bank, so a loan is a great option. Interest rates on a HELOC tend to be relatively low, often comparable to a personal loan for example.

Another common reason to use a HELOC is for an emergency life expense. Homeownership can be expensive, and when you need a new roof or your A/C goes kaput, you need a replacement fast. A HELOC gives you quick access to funds that won't cost you thousands in high interest.

HELOCs can be used in other ways, too. Small business owners may find they’re an affordable source of extra funds. Parents may consider using a home equity line to pay for college or a wedding. Whatever the reason, HELOCs can be an affordable and flexible way to finance major life events or unexpected expenses.

Pros and Cons of HELOC

Like other loan types, HELOCs have pros and cons. These include the following:

  • They provide more affordable access to funds since their closing costs and application fees are typically low.
  • They are easy to manage and budget for, as the borrower only pays interest on the amount used.
  • They have flexible repayment options, which typically include a minimum payment and fixed payment options.
  • They can be used for a wide variety of purposes such as home improvements and debt consolidation.
  • Their interest rates are lower than for other borrowing forms like credit cards or personal loans.
  • The funds can be accessed quickly when needed without having to reapply each time.
  • HELOCs can be difficult to obtain due to credit requirements like a high minimum credit score and/or income thresholds.
  • They can carry a risk of liens on or repossession of a borrower's home if they default.
  • The borrower may be required to maintain a certain amount of equity in their home.
  • An increase in home value may not result in an increase in borrowing power, that is, the line of credit may stay the same even if the property value rises.
  • HELOCs have variable interest rates, so there is a risk of paying more interest over time.
Keep in mind that a HELOC is not the only option available to you and that, before deciding on this type of loan, it’s important to weigh the pros and cons. A HELOC can be an excellent way to finance short-term expenses, but as with any form of credit, risks are involved. It’s always best to sit down and think carefully about the options before deciding.

Can I Get a HELOC from a Different Institution?

The answer is yes, you can get a HELOC from an institution other than your current credit union/ bank or mortgage holder. You can shop for the best rates and terms before deciding which lender to work with. Remember, though, to only open a HELOC with a bank or credit union you trust.

Whatever the source, a HELOC is a loan secured by your home. That means your home could be at risk if you default on the payments.

When you’re considering a HELOC, do your research and make sure you will get the best deal for your situation. Shop around for the best interest rate and read the fine print. Some lenders may offer a promotional introductory period, which can be helpful if you need to borrow for a short-term project.

You'll also want to consider closing costs and fees, typically 2%-5% of your loan amount. Weigh the costs against the potential savings and check the lender's reputation to ensure you are dealing with a reputable company.

You should also know that a new lender may have a number of requirements for granting you a HELOC. These include:
  • Verification of your credit score, income and debt-to-income ratio. The new lender will assess your credit score to determine what kind of interest rate you are eligible for. They will also verify your income and debt-to-income ratio to make sure you can afford the loan and manage the monthly payments.
  • Proof of collateral. You will need to provide proof of collateral, such as the title to a home or car, for the lender to secure your loan. This ensures that the lender can use the collateral to recover their losses should you default on the loan.
  • Documentation on your existing mortgage. The lender will require you to provide documentation such as a deed or loan statement on your existing mortgage. This allows them to check that all of your existing loans are paid off before the HELOC closing and that you are not double mortgaging.
  • Payoff of all existing loans before closing. Again, all existing loans must be paid before the HELOC closing to prevent double mortgaging. The lender will verify that this has been done.
  • Title insurance. To qualify for a HELOC, you must obtain title insurance to protect you against any encumbrances, liens or defects related to the title of the collateral property. This insurance protects you from being held responsible for any debts or obligations associated with the property of which you are not aware.
Sometimes a new lender may require additional collateral such as a life insurance policy or other assets. Overall, the requirements for obtaining a HELOC from a different institution can vary, so do your research and be aware of all the potential requirements to avoid any delays.

HELOC Flexibility

Can I get a HELOC from a different institution? Yes, even from Power Financial Credit Union.

Power Financial Credit Union understands that life can be expensive, and families need affordable solutions for home improvements and unexpected expenses. That's why we offer competitive interest rates, home equity lines of up to 80% of your home's value and repayment periods of up to 15 years. We may even cover up to $1,000 of your closing costs.

If you've been considering applying for a home equity line of credit, you should know it can be easy and hassle-free.

Do more with your money — drop by your local Power Financial Credit Union branch or give us a call to discuss your options with one of our experienced loan experts. Get started on your home equity line of credit today.