Whether you want to fund renovations to increase your home’s value, put a child through college or consolidate high-interest debt, a home equity line of credit can provide the financing you need. A HELOC allows you to leverage the equity in your home at a relatively low interest rate. But before you commit to a HELOC, it’s important to learn how the loan works and what you need to qualify.
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Axos Bank, founded in 2000, is a digital financial services company based in San Diego. The full-service online bank offers everything from personal and business savings and checking accounts to auto and home loans.
Borrowers with an Axos Bank checking account can reduce or eliminate the lender fee and earn cash back by using the account to make monthly mortgage payments.
Pentagon Federal Credit Union, widely known as PenFed, offers borrowers access to many types of mortgages: conventional, adjustable rate, jumbo and Department of Veterans Affairs, plus refinancing loans and home equity lines of credit. The financial institution, which serves 2.5 million members, was established in 1935 and is based in McLean, Virginia.
North American Savings Bank, or NASB, is a Missouri-based bank and lender founded in 1927 that offers home mortgages nationally. NASB provides a variety of mortgage options, including conventional, Federal Housing Administration and Department of Veterans Affairs loans, and products for borrowers who might otherwise have trouble getting a mortgage.
Guaranteed Rate, founded in 2000 and based in Chicago, offers mortgage options including conventional loans, Federal Housing Administration loans, jumbo loans and interest-only loans to customers in all 50 states and Washington, D.C. Borrowers can take advantage of specialized loan products and Guaranteed Rate’s online application, documentation and loan payment options.
A home equity line of credit is a form of revolving credit that is secured by your home. Similar to a credit card, you can borrow against the credit line as needed – up to the limit. When you do so, you pay interest on the balance. As you pay the balance down, more of your credit line opens back up.
Unlike a credit card, however, HELOCs have what’s known as a draw period. This is the timeframe when you’re allowed to spend against your credit limit and are only required to make minimum or interest-only payments. Typically, the draw period lasts 10 years and the repayment period lasts 20 years.
HELOCs can offer benefits including lower interest rates than other forms of borrowing, such as credit cards or personal loans. For that reason, they can be a good choice to fund major expenses such as home renovations or consolidating existing high-interest debt.
Home equity loans and lines of credit each allow you to borrow against the equity in your home. However, there are some key differences. A home equity loan is dispersed as one lump sum that you pay back in fixed installments over time. A HELOC allows you to borrow as much or as little as you need, when you need it, up to the maximum credit limit. Once the draw period is over, you enter the repayment period. HELOC interest rates are often variable rates, meaning they can adjust up or down over time.
When shopping around for a HELOC, it’s important to evaluate a number of factors and ensure you’re working with a reputable lender. Here are a few points to consider:
- Interest rate. One of the most important qualities of a HELOC is the interest rate you pay. When evaluating lenders and offers, you should aim to secure the lowest rate possible, which can save you thousands of dollars over time.
- Fees. Similar to a mortgage or home equity loan, HELOCs come with closing costs. On average, these costs can range from 2% to 5% of the total amount borrowed, according to Discover. Plus, there may be ongoing fees for maintenance and inactivity, for example. Choosing a lender that charges minimal fees will also help you save money.
- Underwriting requirements. Every lender has its own eligibility criteria, including credit score, debt-to-income ratio, loan-to-value ratio and more. It’s important to work with a lender with requirements you can meet.
- Customer service. In addition to offering an affordable line of credit, you also want to know that the lender you choose is helpful and easy to work with. It can be worthwhile to check the company’s online reviews and Better Business Bureau rating.
Every lender will have its own set of eligibility requirements to be approved for a HELOC. However, there are certain guidelines that you should expect to meet.
- At least 15% equity. Most lenders won’t issue a HELOC unless your combined loan-to-value ratio is at most 85%, according to Bank of America. In other words, when you subtract the balance of any loans against your home from the appraised value of your home, the difference should be at least 15% of the property value.
- Good credit. Exact credit score requirements vary by lender. You may be able to qualify for a HELOC with a score of 660, according to Credit Union of Southern California, though some lenders ask for a higher score. A higher score can also help you secure better rates and terms.
- Low debt-to-income ratio. Your DTI measures how much of your monthly gross income goes toward paying existing debt obligations. A lower DTI will leave you in a better position to get a loan.
- Low rates. Even though rates are increasing this year, HELOCs often come with lower rates than home equity loans.
- Borrow as you need. If your borrowing needs change month to month, a HELOC is a great way to ensure you have access to credit when you need it.
- Interest may be tax-deductible. If you use your HELOC funds to substantially improve your home, you may be able to write off the interest on your taxes.
- Home as collateral. Your property serves as the collateral for a HELOC. That means if you have trouble making payments once the draw period is up, your home could eventually be at risk of foreclosure.
- Variable interest rate. Unlike installment loans, the interest rates on HELOCs are variable. While there’s a chance your rate could go down, it’s more likely that it will increase. That would result in higher monthly payments.
- Decreased home equity. When you borrow against your line of credit, you decrease the equity in your home. If you decide to sell, you’ll see a smaller profit since you’ll also need to pay off your HELOC. And if home values drop, you could owe more on your house than it’s worth.
- Home equity loan. If you don’t anticipate any ongoing borrowing needs and only need to finance a specific expense, you may prefer to take out a home equity loan. This allows you to receive the cash you need up front and then pay it off in fixed monthly installments over 5 to 30 years.
- Refinance. Another way to access your home’s equity for cash is through cash-out refinancing. This involves taking out a new mortgage loan for more than you currently owe and pocketing the difference to put toward another expense. This can be particularly beneficial if you can qualify for a lower mortgage rate.
- 0% APR credit card. Some credit cards offer a 0% annual percentage rate to new users for an introductory period that typically lasts 12 to 21 months. If you go this route, it’s important to pay off your balance before the introductory period is up. Otherwise, you could rack up interest charges quickly when the rate adjusts.
- Personal loan. Though they usually come with higher interest rates than HELOCs, personal loans can be a less expensive borrowing option than credit cards. Plus, you don’t have to use your home as collateral, which means it’s not at risk of foreclosure if you fall behind on payments.
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