A HELOC works like a credit card in that you have a line of credit with a maximum you can borrow, and you can draw from this amount and repay it over a specified period, usually between 10 to 20 years. The best part about a HELOC is that you only pay interest on the amount you use.
You will also enjoy numerous benefits like lower rates and taxable deductions, and you can use the funds for any purpose. If this sounds like the right option, read on to learn more about how HELOC works, its benefits, and how you can get the most out of it. This guide also highlights the best ice cream shops in Dixie County, Florida.
What is a HELOC?
A HELOC is a home equity loan that functions like a second mortgage on your home and works similarly to a credit card.
But unlike a credit card, a HELOC uses your home as collateral. You have a revolving line of credit, allowing you to borrow as much or as little as you like but not exceeding your credit limit.
Lenders may use your DTI, credit history, income, and home equity when determining how much they will lend you and what interest rate they will charge.
Depending on the lender, you may incur a fee when taking out a HELOC, just like applying for a traditional mortgage. Before applying for a HELOC, consider these costs and discuss them with your lender.
How HELOC Loan Works
As its name implies, a HELOC is a credit line similar to a credit card, where your lender sets a limit on the amount you can borrow, and you only pay interest on what you use.
You don't receive a lump sum at once but must use the HELOC funds within the specified period or lose the money when it expires. HELOCs have two terms:
The draw period
During this period, you can borrow as much money as you need from the line of credit, provided you don't exceed your credit limit. Lenders require monthly payments, where the minimum amount covers only interest with the option to pay down the principal. This period may last between 5 to 15 years.
The repayment period
The repayment period begins after the draw period ends and lasts between 10 to 20 years. In this period, the line of credit is not available anymore, and your monthly payments include both principal and interest. The monthly amount will probably increase significantly if you only pay interest during the draw period.
Eligibility Requirements for a HELOC Loan
Like any other loan, HELOCs have minimum requirements set by your lender. Though these eligibility criteria may differ for each lender, here are the common factors for qualifying for a HELOC.
A strong credit score
A strong credit score allows you to obtain a HELOC with favorable terms and better interest rates. Although the credit score may vary between lenders, most lenders require a minimum of 620.
It is generally recommended that you have a credit score of 700 or higher, but if you do not have excellent credit, you should consider your options from multiple lenders.
Sufficient home equity
Lenders require you to have sufficient equity of at least 15% to 20 % in your home, which is the amount you owe on your mortgage over the value of your home. They use your home equity to determine the combined loan-to-value ratio, and a HELOC requires 85% CLTV.
Enough equity also protects you from exhausting your financing when your home's value declines during a downturn.
A low debt-to-income ratio (DTI)
Your debt-to-income ratio is among the factors lenders consider when evaluating a HELOC application, and it is better if it is low. Most lenders require a DTI of 43% or less, but some are willing to accept as high as 50%.
A low DTI increases your chances of qualifying for a HELOC since it demonstrates that you can effectively manage your debts.
You must prove to your lender that you have a steady source of income to be eligible for a HELOC. A stable income demonstrates to lenders your ability to pay back your loan on time, and having a higher income lowers your DTI making it easy to obtain a HELOC.
Your level of income may also affect the amount you can borrow.
Have a positive payment history
A positive payment history proves to lenders that you are credit-worthy and don't pose a risk when lending you money.
Although your payment history is included in your credit score, lenders may pay closer attention to how often you make on-time payments. You may be less likely to get a HELOC with a history of late payments, even with a good credit score.
How to Apply for HELOC in Dixie County, Florida
If you have enough equity in your home, you can take out a home equity line of credit. Preparing and knowing what to do when applying for a HELOC helps you stay ahead of the game.
Here are the five simple steps for applying for a HELOC loan:
Find a lender
Finding the right lender involves shopping around for different quotes from multiple lenders and finding the best deal. The lender will guide you on your options or suggest ways to improve your chances of qualifying before you apply for a HELOC.
Also, consider other factors such as closing costs, annual fees, and automatic payment discounts when comparing lenders.
Submit your HELOC application
Once you find a suitable lender, you can apply for a HELOC, and the application is similar to the one for a standard mortgage. You require documentation to verify the value of your home and income and consent to a credit check.
The lender requires a home appraisal to determine the value of your home based on its condition and the current housing market.
Your lender may arrange the assessment, but you must pay the appraisal fee, typically $300 to $500. But you may skip the appraisal if you have substantial home equity and are partly borrowing from it.
Close on the HELOC
Upon official receipt of the documents, you will have three business days to evaluate them, and you can decide to proceed with closing or cancel the HELOC.
The lender will review your documents and approve your HELOC request if everything is in order. Once the loan is approved, you can expect to receive it within 30 to 60 days.
Access your funds
In the draw period, you can access the total amount of your line of credit and withdraw the funds via check, bank transfer, or online transfer to your checking account.
HELOC for Condos in Florida
Florida is the perfect state to buy a condo, and real estate in this sunny state has been booming, with condo prices shooting up in the last couple of years.
If you're considering buying a condo, but the prices are out of your reach, or the down payment could wipe out your savings, HELOC can bail you out.
HELOCs allow you to receive 90% financing by structuring your home loan into two mortgages. You can borrow a max of 75% of the condo's value with the primary mortgage and 15% with HELOC as a second mortgage, and the home as collateral.
Using HELOC to finance your condo has the following benefits:
You don't need to fill out the complete project questionnaire since the condo is subject to a limited review.
The lender doesn't scrutinize the HOA's finances which may otherwise cause them to reject your mortgage application if they are not in order.
It provides 90% combined financing with up to 75% on the primary mortgage and 15% for the HELOC.
Since the HOA has already taken care of your Fidelity bond, you do not need to review it when verifying the condo's insurance.
- The lender does not consider the number of units occupied by the owner or investor when approving a HELOC.
As with any loan, you must satisfy specific requirements since you're getting two loans for a condo. Your primary qualification is having a low debt-to-income ratio since the lender wants some assurance that your income will cover all of your financial obligations.
Why a HELOC is Great for Divorces
Divorce is challenging when splitting properties, especially if you co-own your home with your partner. You can take out a HELOC as a second mortgage on top of your first mortgage.
If you want to keep the house and have enough equity, HELOC can help you buy out your partner's share of the home.
Taking out a HELOC as a second mortgage has different rates and terms from your primary mortgage. This way, it won't affect the interest rate on your primary mortgage, meaning there's no need to refinance your home and risk losing a reasonable rate.
HELOCs are Great for Home Improvements
Taking advantage of your equity may be a smart way to cover your home renovation projects which tend to be expensive.
Because you're taking out a loan, you'll want to focus your renovations on projects such as landscaping, kitchen upgrades, and bathroom remodels that will give you a higher return on investment.
One advantage of using a HELOC for home improvements is deducting the interest while increasing your home's value. That's not all. HELOCs use current values rather than future values and have minimal closing costs.
The Pros of a HELOC Loan
When applying for a HELOC, understanding the benefits helps to decide whether it is the best way to tap into your home equity. The following are some reasons why HELOCs are more appealing than other home equity loan products.
Lower introductory interest rate
A HELOC usually has a lower initial interest rate than a home equity loan and sometimes even less than the interest rate on the primary mortgage.
Most lenders will offer you a competitive introductory rate for a year, which results in borrowers initially paying a reduced monthly payment.
Unlimited access to HELOC funds
HELOCs offer the convenience of borrowing and repaying as often as possible during the draw period.
Due to this, you have more flexibility in accessing your funds than in other home equity loans, where you receive a lump sum in advance when closing the loan. With HELOC, you have more borrowing capacity since you can draw multiple times.
Only draw what you need
A HELOC only allows you to borrow as much as you need at the time, helping you keep track of your monthly payments.
Your repayments depend on the outstanding amount, and the flexibility of borrowing what you need prevents accumulating debt when you don't have an urgent need for the funds.
The interest is tax-deductible
HELOC interest is deductible if you use the funds to buy, construct, or substantially improve the property that serves as collateral.
Additionally, the interest on a HELOC is deductible, provided that the secured loans do not exceed the property's value and the total loan amount. This amount includes the primary mortgage and is not more than $750,000 most of the time.
Unrestricted use of the funds
With a HELOC, you have significant flexibility in accessing and using your home equity. Despite lenders' interest in understanding how you will use the proceeds from a HELOC, there are no restrictions on how to use it.
You can use the funds on the line of credit to finance home upgrades and renovations, pay for college tuition, buy an investment property, or consolidate high-interest debt.
HELOC vs. Cash-Out Refinancing - Which one is Right for You?
Both HELOCs and refinancing can be used to access your home equity. The primary difference is that HELOCs function as second mortgages while refinancing involves taking out a larger loan than what you owe and cashing out the balance after paying off the existing loan.
A HELOC is more flexible, and it's the right choice when you don't know how much you'll need but want to be able to use it whenever you want.
Compared to refinancing, a HELOC has low closing costs, which would increase your current monthly balance. When you use a HELOC, you will also benefit from tax deductions.
Get Ice Cream in Dixie County, Florida
The ice cream scoops will keep you cool and satisfied throughout the summer, with the Dixie County weather heating up.
The county offers a variety of hot spots for classics like vanilla or chocolate or something new like salted caramel or honey cinnamon, and you're sure to find something you like.
Here are five spots to get an ice cream scoop in Dixie County.
Florida Creamery High Springs
When craving variety and mouth-watering flavor in the summer heat, Florida Creamery is the place for you as it serves a wide variety of exciting flavors, you don't just come for ice cream, but it's all about the atmosphere.
When you enter the room, you feel like you have stepped back in time with the music and the artwork, which gives you a nostalgic feeling.
Dockside Ice Cream Shoppe
Grab some of Dockside's premium ice cream, relax on the deck, and enjoy the view as you watch the boats.
Dockside offers a wide variety of flavors, and you should try the cherry vanilla or the Mound sundae, which is coconut ice cream and a drizzle of fudge sauce. This joint is so popular that they have branches in more than ten states.
Lulus serve the most delicious homemade ice cream, and it's the right spot to satisfy your sweet tooth. They make the ice cream in small batches with tasty flavors, and the most popular flavors are Lulu's mango, Chocolate hazelnut, sweet taro honey, and lavender gelato.
It's a very family- and children-friendly place, making it a favorite spot for family ice cream parties.
Pinecone's Ice Cream Parlor
Pinecone's first central selling point is that it is handicap friendly and serves vegan and gluten-free selections. You will also not miss out on the wide variety of flavors with a unique twist.
The pink pie is a fan favorite, and if you're up for an adventure, try the bacon sundaes, a maple-flavored ice cream combined with bacon.
Sweet Dreams is a must-visit place for ice cream lovers, and it doesn't disappoint.
It's impossible to choose a lousy flavor from their menu of delectable ice cream options that you may not find elsewhere. The Mayan spicy chocolate, honey cinnamon, Italian coffee, and Guinness flavors are one-of-a-kind.
A HELOC is the best option if you want the freedom to borrow money whenever you need it without receiving a large lump sum at once and the flexibility to pay back the borrowed funds on your schedule.
HELOCs make sense when you have enough equity in your home and are disciplined enough to repay them. Contact your lender today for more information on HELOCs and how to apply.