As your mortgage balance declines and your property value increases, you accumulate equity in your home. This is a form of wealth that you can tap into and use to pay a variety of expenses.
“Home equity is more than just a number,” explains Jo Ann Theriault-Fazio, SVP of Mortgage Lending & National Sales Director at Proper Rate. “It’s a reservoir of potential that, when tapped wisely, can transform your financial landscape.”
“Tapped wisely,” though, is key.
What’s a HELOC?
A Home Equity Line of Credit (HELOC) is a common way to quickly and easily tap into your home’s equity. HELOCs typically allow homeowners to borrow up to 80% to 90% of their home’s equity, which is calculated as the appraised value minus the outstanding mortgage balance.
HELOCs are closer to credit cards than mortgages when it comes to the structure of the loan, but the advantage is that they usually carry a much lower interest rate and, depending on your equity, a higher borrowing limit. Homeowners can draw from their HELOC and only make payments – and pay interest – on what they use.
“You can apply for a $100,000 line of credit, but if you only tap $5,000 of those funds, then you’re only making payments and being charged interest on that outstanding balance,” Sam Fazio, SVP of Mortgage Lending at Proper Rate explains. This enables homeowners to manage their finances more efficiently, borrowing only what they need and managing repayment in a way that aligns with their financial capacity.
HELOC term lengths are divided into two phases. Draw periods come first with a term of 5 or 10 years, during which homeowners can draw on the line of credit. During this time, you are required to pay interest on the loan. You can also choose (but are not required) to pay back any principal balance as well. Meanwhile, the subsequent repayment period may last for 10, 15 or 20 years, and you can no longer access additional funds and must make regular principal-plus-interest payments.
How can HELOCs be used?
Sam Fazio explains that a HELOC can be used for virtually anything, including home improvements, consolidating debt including paying off credit cards, or even funding educational expenses. This flexibility, he adds, is central to a HELOC’s appeal.
HELOCs can also be tapped when purchasing a second home. Doing this, he says, can be an excellent alternative to bridge loans when it comes to providing homeowners with the liquidity needed to get to close.
How to Secure a HELOC
Qualifying for a HELOC, may be easier than some traditional loan products, and often comes with faster funding on approval, Fazio notes. That said, like any loan or line of credit, creditworthiness plays a significant role. Most lenders are looking for a credit score of around 700 to finance a HELOC.
You’ll also need a low debt-to-income ratio, minimum percentage of equity in your home, sufficient income and reliable payment history.
The Catch?
Overall, HELOCs provide a flexible and efficient financial solution. The biggest con is that your home serves as collateral for a HELOC. If you’re unable to repay your HELOC for any reason, you are risking foreclosure.
As with any financial decision, it’s essential to approach HELOCs with a clear understanding of the terms, conditions, and your own financial situation. Leveraged properly, though, HELOCs can be a valuable tool for financial security.