With such a resource, it makes sense if you are considering various options with which you can access this equity. One of the best ways to do this is through a HELOC loan, which, as this article will show you, offers varied benefits, including a higher loan amount and the flexibility to use the finances in whichever way you deem fit.
What is a HELOC Loan?
HELOC stands for; home equity line of credit. It allows you to borrow money against the home equity you have built. It acts as a second mortgage, meaning you can get it even while still making payments on your mortgage. If you own the home outright, it will serve as your primary mortgage.
Because it is a line of credit, it differs from other traditional loans since you do not get the whole amount of money as a lump sum, but you withdraw as you need the cash.
You only have a set limit you can borrow during the set period. Thus, you only pay back what you have used. In this regard, it works more like a credit card. Because it is a secured loan (your home serves as collateral), you will get favorable interest rates compared to personal loans and credit cards.
How a HELOC Loan Works
Once you receive approval for your HELOC loan, you will have two phases; the draw period and the repayment period. During the draw period, which usually lasts 10 years, you can withdraw as much cash as you need each month until the set cap.
Most lenders will also set the minimum amount of withdrawal, which depends on your credit limit and varies from lender to lender. During the draw period, you usually make interest-only payments on the amount borrowed though you can always pay more than the interest to reduce your overall debt.
Once the draw phase ends, you will enter the repayment phase. During this period, you can no longer make any withdrawals, and you have to pay the outstanding amount. Depending on the lender and your loan agreement, the repayment can be made over time, usually over 20 years, or at once.
Regardless of the arrangement, it helps to pay back more than the interest amount during the drawing phase, which makes it easier to clear the outstanding loan amount during the repayment phase.
You can then always negotiate for an extension of the line of credit if necessary, and you do not place your home at risk should you fail or default on your payments.
The amount of loan you get from a HELOC depends on several factors, the main one being the market value of your home and the amount of home equity you have.
Other factors include your credit rating and debt-to-income ratio though this may affect your interest rates more. The duration ranges from lender to lender, and some may go as far as 30 years to give you 10 years of the drawing phase and 20 years of repayment.
How to Qualify for a HELOC Loan
Who qualifies for a HELOC varies from one lender to another, and some may have stringent requirements while others may have lax requirements. However, some qualifications are standard across the board, and these include the following;
Minimum home equity
Home equity is the value you get after deducting your mortgage balance from the current value of your home. To qualify for a HELOC, you should have at least 15% to 20% in home equity.
However, even with high home equity, there is a limit to the amount you get. Lenders use the loan-to-value ratio (LTV) and the combined loan-to-value (CLTV) ratio.
To get the LTV, you divide your mortgage balance by your home's current value. To get the CLTV, you add up all loans secured against the home and divide it by its current value. Most lenders usually prefer you have a CLTV of 85% and lower, while some can tolerate CLTV ratios as high as 90%.
Have excellent credit
As with any other loan, you need a good credit score. A higher credit score ensures you get better interest rates. The minimum for a HELOC loan is 620, though it helps if you have higher, even in the 700s.
Have enough income and supporting documentation
Lenders have to know you can afford to pay back the loan. You should show sufficient income and provide the necessary documentation to back this up.
Such documents should show your employment or income information and, depending on your situation, could include the following;
Low or manageable amounts of debt
The amount of debt you are servicing affects the income available to repay the new debt, affecting whether you qualify for a new loan and its amount.
Lenders use the debt-to-income (DTI) ratio to determine whether borrowers' available finances can support new debt. DTI is your monthly debt obligation compared to your monthly income. Most HELOC lenders will require a DTI no higher than 43% to 50%, but some will require even lower for you to qualify for a HELOC.
Advantages of a HELOC Loan
The main HELOC loan advantages are;
Lower interest rates
With HELOCs, you get lower interest rates, especially compared to products that could be used similarly, like credit cards and personal loans.
For instance, while the average interest rate for a $30,000 HELOC loan was around 6.5% in August 2022, personal loans have an interest rate of 8.75%, and credit cards had a 15.13% average APR over the same period.
You can lock in your rate
While HELOC loans are typically offered at variable interest rates, some other lenders offer an option to lock in or have a fixed interest rate on your outstanding balance.
Through this option, you can protect yourself against rising interest rates and have a predictable amount to clear every month.
You only pay for what you spend
A further advantage is that you only get to pay for have spent and the accrued interest. Unlike home equity loans and most other financing options, you pay back the total amount and accrued interest regardless of whether you use it.
This flexibility makes HELOC loans the best option for projects whose cost is not known upfront, and it also prevents you from being stuck paying interest for massive amounts you did not need.
You are not limited on how to use the money
Unlike other forms of financing, a HELOC loan works as a credit card or a personal loan because you can use it for anything.
These include home improvements, debt consolidation, meeting medical expenses, or even investment in business ventures.
You enjoy introductory offers
Most HELOC loans have introductory offers for new customers to attract business. These offers include low-interest rates up to a specific period or waived fees. They can be significant enough to amount to sizable savings upfront.
You have a considerable loan amount
Because your home acts as collateral for the loan, lenders have less risk should the borrower default on payment. As such, they can give higher loan amounts than what you get from unsecured loans, yet you can use them for anything, unlike most other secured loans.
Ultimately, your home equity and other values determine your loan amount, but it is still more substantial than credit cards and personal loans.
HELOC Loans for Divorce Settlement
One of the surprising ways you can use HELOC loans is for a divorce settlement. In cases where the judge decides each spouse is entitled to 50% of the home equity, converting the equity to cash can be challenging.
If you sell the home, you lose about 10% of its value in fees and agent commissions. You and your ex-spouse will still have to buy again, thus incurring further fees and closing costs, and higher mortgage rates.
You may consider refinancing, but that can easily double your interest rates. HELOC loans are often the best option as they offer the following advantages;
Some options could give you up to 100% combined loan-to-value financing.
You avoid agent commissions and other fees that come with selling a home.
You can get options to lock in your current rate.
You do not lose the current low primary mortgage rate.
- You avoid having to buy another home again.
HELOC Loans for Condos in Florida
A HELOC is also an excellent financing tool when used for a condo. Condo owners in Florida can enjoy 75% max financing on the 1st mortgage and 90% combined financing on the first and second mortgage for a primary residence.
You also only need a 15% home equity. It only requires a limited review, so you get a little questionnaire instead of an entire condo review process.
The limited review means you do not need to worry about the number of owner-occupied units, which is a full review that will be captured and can harm your chances should the number exceed the threshold.
Further, the lenders do not have the authority to scrutinize the association's budget and thus cannot tell which amount of funds go to the reserves. Also, when the condo insurance is reviewed, one does not need to verify fidelity bond coverage.
HELOC Loans for Home Improvement
For many home improvement projects can be hard to set a fixed budget. HELOC loans are often the best option for home improvement, especially when compared to cash refinancing. Their biggest draw is the flexibility of HELOC loans.
With a HELOC loan, you can borrow as much or as little as you need to complete the project to the required standard. The flexibility also extends to the payment structure as one pays up the interest only or with extra amounts they may afford, which lessens the pressure on monthly payments.
Other advantages of HELOC loans for home improvement include the following;
You get low or, in some instances, no closing costs.
You can enjoy tax breaks by writing a portion or the whole interest amount from your annual tax filing.
You can get fixed tax rates.
Lower interest rates.
You get to pay back only the used amount.
- You have an extended borrowing period.
How to Apply for a HELOC Loan
Applying for a HELOC is straightforward and typically follows the five steps below.
Search and compare lenders - Do not pick the first lender you get, even if it is your usual bank or credit union. You should give yourself as varied options from as many lenders as you can get. You should then compare these options by looking at things like repayment terms, eligibility requirements, the amount of loan they are offering, and interest rates.
Prepare your documentation and fill out the application - After picking a lender, the next step is to fill out the application. You will need varied documentation, including bank statements, W2s, and tax returns. You can do this online, or in some cases, you may have to visit the lender's premises.
Get a home appraisal - Once a lender approves your income and credit, they will need to appraise your home to establish the current value. They may use an automated valuation model or require an official appraisal. In the case of the latter option, the lender schedules the appraisal, but you meet the expenses by paying an appraisal fee of about $300 to $400 for a single-family home.
Prepare for closing - After the appraisal, the lender will inform you if they approve your HELOC application. They will also give you further details, like your interest rates and approved credit line limit. If you decide to proceed, you will sign the loan documents, and closing costs will be added to the loan amount.
- Get your funds - After closing, the lender typically gives you three business days to withdraw from the agreement should you change your heart. After three business days, you gain access to the HELOC, and you can make withdrawals whenever you want.
Your lender and the complexity of your application will determine how fast you can access the loan. The process, from application to closing, usually takes two to four weeks. In some instances, though, it may take up to six weeks for the whole process to end and for you to get your HELOC loan.
Top Places to Get Ice Cream in Columbia County, Florida
The best ice cream shops are located in Columbia County, Lake City. Here are some local favorites to explore.
Dairy Queen Grill and Chill - This spot is located along 2984 W US Hwy 90, Lake City, FL and has one of the best menus you will find anywhere. Ice cream lovers will find their choice in the classic treats, including attractive options like the caramel sundae, the peanut buster parfait, and the banana split. You will also enjoy the amenities.
Baskin Robbins - Baskin Robbins has nationwide fame, and in Columbia County, Fl, you will find them at 2888 W US Hwy 90 Ste 101, Lake City, FL. They boast an extensive menu from their cones to treats. It would help if you started on brand favorites like the Spicy and Spooky chocolate and pepper flavored ice cream or try the Pumpkin cheesecake.
Ellianos Coffee - Ellianos Coffee is a drive-through coffee shop and the place to go if you want your ice cream caffeinated. You have endless options from their ice drinks like the Carmella (espresso vanilla, milk, and caramel drizzle served over ice) or the smoothies and the freezers. Our favorite is the Turtle, rich dark chocolate mixed with a blend of creamy ice cream, caramel, and espresso.
- BW Blacksmith Deli and Grill - BW Blacksmith Deli and Grill is another coffee place still serving some of the best ice creams around the county. They offer their ice cream in floats, cups, and cones. It is found on the 419 FL-247, Lake City, FL, and it is perfect if you want to pick or order your ice cream with a proper meal or other snacks because of its menu variety.