As a homeowner, you’ve worked hard to build equity in your home. If you are now looking for ways to use that equity to your advantage, a home equity line of credit may be a fantastic option. Whether you are interested in funding home improvements, consolidating debt, or covering education expenses, a home equity line of credit could be a flexible solution. Read on to discover if a home equity line of credit would help you tap into your home’s equity!
Home Equity Line of Credit (HELOC) Basics
What is a HELOC?
A home equity line of credit (HELOC) is a revolving line of credit that allows homeowners to borrow against their home’s equity. As a revolving line of credit, you can borrow what you need, repay it, and borrow again during a specific period (typically referred to as the “draw period”).
Unlike refinancing, a HELOC does not impact your original mortgage; it is a separate loan. Does it sound like a HELOC may meet your financial needs? Contact our Loan Officers to discuss your options!
How does HELOC repayment work?
There are two stages of a HELOC: the draw period and the repayment period. The draw period is when you borrow the needed funds. This period usually lasts five to ten years and often only requires monthly interest payments.
Once the draw period ends, the repayment period begins, which can last up to 20 years. During the repayment period, you must make monthly payments based on the total amount borrowed plus interest.
If you have additional questions about whether HELOC repayment makes sense for your financial future, RoundPoint is here to help.
What are the advantages of a HELOC?
Key benefits of a HELOC include:
- Flexible terms: Unlike a home equity loan or personal loan, which provide a lump sum to be repaid in full, HELOCs allow you to use only the funds you need, meaning you are only repaying what you borrowed (with interest). In the event you need less cash than what you originally thought, you will have smaller repayments.
- Easily accessible: Most lenders offer a variety of options to access your HELOC funds including debit cards, online transfers, and ATM withdrawals.
- Lower interest rates: Since your home secures the loan, lenders typically offer lower rates compared to credit cards or unsecured personal loans. Not only does this potentially help you save money over time, but it may also make a substantial difference when consolidating debt or financing home improvements. Ensure you are mindful of the variable- versus fixed-rate alternatives, as these impact your loan’s rate.
Call our Loan Officers or begin your application to see how a HELOC may benefit you.
Qualification Requirements
How do I qualify for a HELOC?
Like many other loans, there are standard requirements to qualify for a HELOC. Some of these basic qualifications include:
- Good credit: A qualifying credit score, typically at least 640, is required in most instances.
- Manageable debt: A debt-to-income ratio (DTI) less than 43% is often required.
- Sufficient equity: As a general guideline, you should have at least 15-20% equity in your home, but this requirement varies by state
- Steady employment and income: Stable income and employment history, including supporting documentation like tax returns, bank statements, and pay stubs.
Our convenient Home Equity Calculator is a great tool to estimate your monthly HELOC payments. Want a more custom estimate? Contact one of our Loan Officers!
Rates
What are the HELOC rate options?
Traditionally, HELOCs have variable interest rates, meaning the rates (and your payment amount) will fluctuate over time. Although they are less common, fixed-rate HELOCs also exist, allowing you to lock into a rate and payment for the duration of the loan. Using our Home Equity Calculator, you can see how different rates and loan could impact your payment.
Much like any other loan, it is important to shop around, as well as consider whether you and your financial situation are better equipped for a fixed or variable rate. Let RoundPoint help you discover some of the best options tailored to your specific needs and goals!
Fees & Costs
What fees and costs are associated with HELOCs?
Similar to a first mortgage and other loan options, there are fees and costs involved with HELOCs. Some of these charges can significantly impact your monthly payment amount and the total cost of the loan, so it is important to understand what you are paying for and why.
Let’s look at some common fees and costs associated with a HELOC:
- Origination fee: Typically anywhere from 1% to 5% of the total loan amount, this fee is charged by lenders for processing your loan.
- Application fee: Application fees, ranging from $0-$500, are charged when submitting a loan application.
- Appraisal fee: This can cost anywhere from $150 to over $1000, depending on the type of appraisal performed.
- Recording fees: Local government requires payment to register your credit line. This cost varies.
- Transaction or draw fee: Some lenders charge fees per withdrawal or may even have minimum withdrawal requirements. These fees vary by lender and may be negotiable, so it is important to research, compare, and, if appropriate, negotiate to ensure you are receiving the best deal and reducing your costs.
Our Loan Officers look forward to helping you discuss an affordable solution that meets your needs.
Home Equity Options At a Glance
Using Your Home Equity: Comparing Your Options
| Refinance | Home Equity Loan | Home Equity Line of Credit (HELOC) | |
| What is it? | A new mortgage loan that replaces your existing mortgage loan | A fixed-term loan | A revolving line of credit |
| Funds | Lump-sum check or reduced monthly payment due to change in term and/or rate | Lump-sum check | Withdraw funds as needed |
| Interest Rates | Fixed or adjustable | Fixed | Adjustable |
| Upfront Costs | Closing costs similar to initial mortgage purchase | Typically lower closing costs than cash-out refinance | Often the lowest closing costs, sometimes none at all |
| Number of Payments | One consolidated monthly mortgage payment | Two payments: one for your primary mortgage and one for the home equity loan | Two payments: one for your primary mortgage and one for the HELOC |
| Ideal For | Homeowners interested in accessing a large lump-sum amount, lowering your rate, and/or changing your term | Homeowners looking to fund a large expense but wanting to keep their original mortgage rate and terms | Homeowners needing to pay for ongoing or unexpected expenses that are also comfortable with varying rates and payment amounts |
