Usually, you can secure a HELOC loan against your home's equity, which means that lenders might offer you lower rates than they do on other personal mortgages. The HELOC loan acts as a second mortgage and provides a cash equivalent of your home equity.
Homeowners needing funding prefer this loan option due to its flexibility and relatively lower interest rates. This guide will walk you through everything you need about this line of credit.
What is a HELOC Loan?
The home equity line of credit (HELOC) lets you borrow money against your home equity. The HELOC resembles a credit card, given that you'll access a revolving source of funds. Usually, you'll receive the loan amount as a line of credit. Although this line of credit has multiple similarities with a credit card, you'll enjoy substantially lower interest rates.
With the HELOC, you'll repeatedly borrow against the credit line before you exceed the spending limit. Often, this loan option will have a variable rate. Expect the interest rate to fluctuate based on market conditions.
Unlike a home equity or personal loan, you won't receive the whole loan in a lump sum. This loan option works on a 30-year model divided into the draw and repayment periods.
Draw and Repayment Period
The initial phase usually represents the loan's draw period. Typically, you'll have ten years to withdraw cash from your credit line. During this period, you'll only make payments toward your interest. However, you could opt to make some payments towards your principal amount.
Ensure that you repay all the money you borrowed. Afterward, your lender will give you 20 years to repay your principal amount plus interest. During this repayment period, you no longer have access to any funds. With the HELOC, you'll only make payments towards the amount you spent.
If you only made interest-only payments during the first phase, your payments will go up significantly. The alternative would be to make principal payments during the draw period. This approach ensures that you don't experience difficulty during the second phase.
Qualifying for a HELOC
You must meet specific eligibility requirements to get approval for this line of credit. Your credit score, debt-to-income ratio, and home equity all influence whether or not you qualify. The top qualification requirements include the following:
A high credit score
Your credit score usually reveals whether or not you're a high-risk borrower. When it comes to mortgage applications, a higher credit score is always better. Most lenders offer loan approval for borrowers with a credit score that falls in the mid-to-high 600s. Such credit scores indicate that you repay your loans promptly.
Besides earning your loan approval, a higher credit score ensures that you get better interest rates. Typically, your repayment history also influences your credit score. Lenders also assess your history to determine your risk exposure level. Essentially, lenders require assurance that you can repay your loan reliably.
A low debt-to-income ratio
You'll also need a low amount of debt before getting approval for the loan. Lenders will assess your debt-to-income ratio to determine whether you'll qualify. This ratio compares your monthly debt payments against your monthly income.
Most lenders require a DTI ratio of 40% or less. Typically, your DTI ratio will reveal if you can reasonably take on more debt.
Sufficient home equity
Home equity represents what remains after dividing your mortgage loan against the home's current value. Lenders require you to have equity of at least 15% to 20% before approving your loan. Your loan limit will depend on other factors besides your home equity.
Some lenders will let you borrow up to 85% of your home's value. Others will consider your loan-to-value (LTV) ratio before determining your loan amount. Your combined loan-to-value ratio will also influence your loan limit. However, the loan limits depend on different lenders.
Sufficient Income and Documentation
Lenders also need to know that you can afford to repay the loan. Most lenders will require you to provide income documentation before approving your loan. You could provide pay stubs and W-2s as proof of your employee wages. Your federal tax returns will be sufficient if you are self-employed.
If you receive social security benefits, you'll need to provide a verification letter. On the other hand, benefits statements and retirement award letters will indicate any other income or benefits.
75-15 HELOC for Condos in Florida
Get up to seventy-five percent maximum financing on your first mortgage if you have a condo in DeSoto County. You could also leverage 90 percent combined financing on your first and second mortgages for the primary residence.
Using the 75-15 HELOC means lenders won't analyze your association budget. Besides, there won't be any scrutiny on the funds you direct to reserves. However, lenders review your condo insurance. In such instances, fidelity bond coverage won't require any verification.
It's also important to note that most lenders won't care about the number of investors and owner-occupied individuals. Ultimately, expect a much easier loan application process which only entails a little condo questionnaire.
Ideal for Divorces
Are you going through a divorce process and can't raise funds to settle your spouse's home equity? The home equity line of credit can help. With this loan option, your primary mortgage will remain intact as the loan serves as a second mortgage.
Besides, you could use funds from the loan to pay the divorce settlement payout. Previously, you had to take cash out refinance to finance most activities during this phase of your life. However, with the refinance, you might lose a great interest rate on your first mortgage.
HELOC loans also let you lock in your rate after closing. Essentially, you won't have to pay higher rates down the road. Also, using this line of credit means you won't have to sell your home. With this approach, you won't need to spend money on agent commissions and other fees.
Leveraging this line of credit also makes you eligible for 100% combined loan-to-value.
Suitable for Home Improvements
HELOCs offer low to no closing costs, meaning you'll have a cheaper way of renovating your home. This loan option provides extended flexibility, especially when borrowing and repaying the loan.
The loan funds will help you improve your home's value with ease. You'll also enjoy flexibility on the underwriting guidelines. Using the funds for home improvements makes you eligible for interest deductions.
Prioritize making valuable home improvements with this loan amount. You're more likely to get good value for your money if you focus on improvements that increase your home's square footage or improve your home exterior. Consider finishing your basement or upgrading your home's landscape.
Benefits of the HELOC Loan
Here are some major benefits you can expect:
Fixed Interest Rates
While rates might vary, some lenders let you fix or lock in your rate. Essentially, such lenders shield you from rising interest rates on your loan balance. With this option, you can enjoy more stability in a rising-rate market.
The only catch is that this option might have specific fees. Also, some lenders might require you to pay a higher initial interest rate. Shopping around for lenders ensures that you get the best possible rates.
Lower Interest Rates
Usually, this line of credit offers lower rates than personal loans and credit cards. Overall, this loan offer lets you consolidate your existing debts at a lower interest rate. Remember that your credit score will determine the rate you receive.
Pay for what you Spend
With HELOCs, you'll only need to pay the amount you spend during the loan's lifecycle. Other home equity financing options require you to repay the entire loan regardless of expenditure.
Do you have an upcoming project but are not sure about the total cost? Consider applying for this line of credit. You'll be able to tap into a significant amount of funding. On the other hand, you won't get stuck paying interest on the money you didn't use.
Borrow Large amounts of cash
Lenders have no qualms about offering you large sums of cash, given that your home secures the loan. The collateral of your home means that you are less likely to default on the loan hence the higher loan amounts.
HELOCs continue to grow in popularity because of the meager closing costs you'll need to pay. Besides, some lenders might offer you the loan without requiring upfront closing costs. Local credit unions and national banks often provide this loan option. You might also want to scout local banks to try and find zero-cost loans.
If you can't find a no-closing-cost lender, prepare to pay closing costs in the form of appraisals, taxes, credit report fees, and signing fees. Lenders who use an automated valuation model will help you save significantly on appraisal expenses.
Some lenders offer special introductory interest rates that attract homeowners with sufficient equity. Also, some lenders might waive upfront costs.
While considering this loan option, look beyond these initial offers. Overall, the offers will save you significant cash amounts upfront.
No Restrictions on how you spend the money
This line of credit resembles a personal loan or credit card because you can use the funds as you please. Whether you're looking to consolidate your debt, pay medical expenses, start a business, or fund a home improvement project, HELOC funds will serve you just fine.
While you can use this amount for any purpose, it is prudent to reserve these funds for expenses that build your wealth. Alternatively, you could spend this money to step up your emergency fund.
Using the funds to finance vacations or depreciating assets won't be appropriate. Instead, focus on consolidating your debt into a single loan and enjoy significant interest savings. Spending this money clearing any pending higher education fees will make more sense.
The Loan Application Process
For a loan application, you'll need to provide relevant documentation to indicate that you're creditworthy. Here are the typical loan application steps to follow.
Determine your home equity - Use a HELOC calculator to determine if your home equity is sufficient for the loan.
Scout for lenders - Shop around to compare available loan options. Strive to find a lender to offer a loan that resonates with your specific needs. During this process, assess different lenders' interest rates, repayment terms, and charged fees. You might also want to consider the eligibility requirements of other lenders.
Gather the required documentation - Compile relevant documentation that'll need to apply for the loan. Your income verification details and credit score report will be necessary.
Home Appraisal - If your lender approves your income and credit, they'll want to determine your home's current value through an appraisal. However, most lenders schedule the home appraisal and set aside some money to cover the appraisal fee. Expect to pay between $300 and $400 if you own a single-family home.
Closing Preparation - After the home appraisal, expect a notification indicating that you have full approval for this line of credit. At this point, your lender will provide additional details, including your interest rate and credit line limit. On your part, you'll need to sign the loan documents if you opt to proceed with the loan.
- Access the Funds - Do you have second thoughts about the HELOC loan? If you don't change your mind, you can access the loan funds and start making withdrawals. Your lender will give you three business days to back out of this loan.
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Martin’s Country Market - 1999 SE Highway 70 Arcadia, FL 34266
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Get your finances in order with a HELOC loan
HELOCs are suitable loan options if you are keen on tapping into your home equity. This loan option offers you an inexpensive way of making the most of the equity you have in your home. Remember to work with experienced lenders to have a streamlined loan process.