HELOC loans are essentially lines of credit backed by a borrower's home and can be used similarly to credit cards. These loans offer you a revolving line of credit that you can use to finance a mortgage, pay off high-interest debts, or fund a home remodeling project.
This versatility and the low-interest rates that these loans typically charge make them highly attractive for homeowners looking for an easy line of credit.
In this complete guide, we'll have an in-depth look at what HELOC loans are, how they work and how you can benefit from them. Keep reading to find out more.
What Is A HELOC Loan?
As highlighted at the outset, a HELOC loan is secured against your home. However, HELOC loans are not disbursed in a lump sum payment, unlike traditional mortgages.
Instead, you receive them as a revolving line of credit. That said, the fact that HELOC loans are secured against your home means they are considered a type of mortgage.
HELOC loans function similarly to credit cards since you can pull from the revolving line of credit up to a given credit limit. HELOC loans also offer you complete access to the credit line upon closing, and you can withdraw as much or as little as you want while only paying interest on the amount you use.
This differentiates them from other credit options, such as home equity and personal loans, typically disbursed in a lump sum. You're required to pay interest on the entire amount whether or not you use all of it.
How Do HELOC Loans Work?
HELOCs typically follow a 30-year model of operation. Once you open your HELOC loan, you're given a 10-year draw period during which you can withdraw funds up to your HELOC limit or utilize your HELOC card or checkbook to pay bills.
You only have to pay interest on the money you withdraw during the draw period, as the balance of your credit line is not subject to interest charges. During this period, you can also start paying down your principal amount.
After your draw time expires, you begin a 20-year repayment term during which withdrawals are not permitted. Instead, you will begin to pay monthly interest and principal on your HELOC balance.
Qualification Requirements For HELOC loans
You must satisfy several requirements to be eligible for a HELOC loan. These include.
When it comes to mortgages, equity is the amount of stake a borrower has in their home. To put it another way, it's the difference between what you owe on a mortgage and the current mortgage value of the property.
To be eligible for a HELOC loan, you must have a minimum equity of 15 - 20 percent. That said, the HELOC limit that your lender offers may depend mainly on your loan-to-value (LTV) ratio. To determine your LTV ratio, divide your mortgage balance by the market value of your home. An LTV value of 80% or less is ideal when applying for a HELOC loan.
It's also worth pointing out that besides your LTV value, HELOC lenders are also interested to know your combined loan-to-value (CLTV) ratio when evaluating your application. CLTV ratio essentially describes the total amount of debt you have on a property about its market value.
To compute your CLTV ratio, cumulate all the secured loans on your home, including your primary mortgage and home equity loans, then divide it by the total value of your home.
To qualify for a HELOC loan, it's recommended to have a CLTV ratio not exceeding 85%. However, some lenders may still approve you for a HELOC loan even with a CLTV of 90%.
HELOC lenders generally pay attention to borrowers' credit scores when qualifying them for this type of credit like other mortgages. This helps them determine whether a borrower is capable of repaying the debt or is likely to default.
Although the credit requirements for HELOC loans may vary depending on the lender, it's recommended to have a minimum FICO score of 680 when applying for this loan. Even so, having a higher FICO score can be more advantageous as you stand to enjoy higher HELOC credit limits and lower interest rates.
When determining your eligibility for a HELOC loan, lenders usually pay close attention to your income status, as this gives them an idea of whether you can repay the loan. For this reason, your lender may require you to provide proof of income and employment status.
Some documents you may be asked to submit include the most recent W-2 forms and pay stubs, recent federal tax returns, Benefit statements or 1099 forms, and social security account.
Your debt-to-income (DTI) ratio is another critical factor that HELOC lenders consider when qualifying you for this line of credit. Examining your DTI ratio gives lenders a general idea of how well you're managing your debts and whether you're in a position to take up new debts.
To qualify for a HELOC loan, it's advisable to have a DTI ratio not exceeding 50%. Some lenders may require a much lower DTI to approve you for a HELOC.
Overview of the 75/15/10 HELOC for Condos
As mentioned earlier, a HELOC loan is similar to a mortgage because your home backs it. This means that you can use the loan to finance part of the home purchase costs. For instance, if you're planning to buy a condo in Florida, you can leverage a HELOC loan to buy the home by taking out a 75/15/10 piggyback loan.
A piggyback loan is a second mortgage you take out simultaneously as your primary mortgage to finance the remainder of your home purchase. Piggyback mortgages are a great way to finance a condo purchase if you don't have enough money for a large down payment.
The advantage of taking up a piggyback mortgage at the same time as a primary mortgage is that it exempts you from having to pay exorbitant private mortgage insurance (PMI), thereby saving you lots of money in the long run.
Although there are various piggyback mortgages available for homebuyers, the 75/15/10 is arguably the most common that people who are looking to buy condos typically go for.
With this arrangement, your primary mortgage represents 75% of the total value of your home, 15% represents the HELOC second mortgage, and 10% is the down payment you pay out of pocket. This means you can enjoy up to 90% combined home financing through this option.
Understanding HELOC and Divorce
Let's face it, getting a divorce is one of the most challenging life experiences anyone can have. It can even be more complicated if you have to figure out how to divide home equity with your ex-spouse.
Under these circumstances, many people often opt to sell their houses. However, the problem with this option is that it can cost you up to 10% of the home value in agent commissions and other fees.
Furthermore, if you decide to purchase a new home, you'll inevitably have to deal with more expenses in the form of closing costs and potentially high mortgage rates. Alternatively, you may opt to do a cash refinance, which is also likely to incur a lot in interest rates.
So how exactly can you navigate a divorce settlement without incurring such liabilities? Well, an excellent option to look into would be to take out a HELOC loan to help you pay out your ex-spouse. The advantage of taking out a HELOC loan for a divorce payout is that it doesn't affect your primary mortgage.
In other words, your primary mortgage remains intact, and you'll still be required to jointly pay it with your ex-spouse assuming you co-borrowed the mortgage.
In addition, HELOC loans allow you to borrow up to 100 percent of your home's equity, which you don't enjoy with cash refinancing. Also, many HELOC lenders will allow you to lock in part or all of the HELOC amount once you close on the mortgage.
Should I Take Out A HELOC For Home Renovations
Yes. HELOC loans are an excellent financing option if you want to remodel your home. This is because HELOC loans, just like credit cards, allow you to access a revolving line of credit up to a specific limit depending on the amount of equity you have in your home.
When you take out a HELOC to perform renovations on your home, you'll only be required to pay interest on the amount you withdraw. This borrowing and repayment flexibility means you could potentially save thousands of dollars in interest rates.
Another advantage of taking a HELOC loan to renovate your home is that you get to enjoy much lower interest rates than you would with credit cards. This makes it possible for you to increase the market value of your home while keeping your expenses minimal.
Taking out a HELOC loan to renovate your home also allows you to take advantage of tax deductions. This means that if you're using the HELOC entirely to renovate your home, you can deduct the interest on the loan from your annual tax returns.
Benefits Of HELOC Loans
You stand to enjoy numerous benefits from HELOC loans, unlike other types of credit, such as cash refinancing and home equity loans. These include:
No Restrictions On The Use Of The Funds - While HELOC loans are essentially second mortgages, there's no restriction on how to utilize the funds you receive. You can use the HELOC to pay a mortgage, settle a divorce payout, renovate your home, invest in your higher education, and so on. Even so, it's generally advised to spend the money responsibly. This is because your home backs the HELOC loan, and failure to repay it might lead to your home being foreclosed.
You Can Enjoy High Credit Limits - Depending on how much equity you have in your home, HELOC loans may offer you much higher credit limits than you would otherwise receive with credit cards and personal loans. This is why HELOC loans are often the best financing option for large projects such as home renovations and consolidation of high-interest debts.
Low-Interest Rates - One of the problems with credit card loans is that they often attract very high-interest rates of up to 12% and even more. This is usually because any collateral doesn't back credit card loans. In contrast, HELOC loans are backed by physical collateral (a home), which the creditor can repossess if the borrower defaults. For this reason, HELOC lenders are usually willing to offer these loans at very low-interest rates, sometimes as low as 3%.
They Are Flexible In Terms Of Borrowing and Repayment - HELOC loans offer a revolving line of credit from which you can withdraw a specific amount of money you need and only pay back what you use. Moreover, you're only required to pay interest on the amount you use, making them a very flexible credit option.
- You Can Lock In A Rate After Closing - Many HELOC lenders offer fixed-rate options wherein you can lock in part or all of your HELOC balance at a fixed interest rate. This cushions you from high interests that may arise due to market factors such as inflation.
Advantage Of HELOC Better Over Cash Refinance
HELOC loans and cash refinancing are arguably the two most popular forms of credit for homeowners. However, unlike HELOCs, which offer you a revolving line of credit, cash refinancing entails taking up a larger mortgage which allows you to pay off your primary one and remain with extra cash to use for other expenses.
The problem with cash refinancing is that it can potentially open you up to higher interest rates than HELOCs. Likewise, securing cash refinancing entails rigorous underwriting and stricter lending requirements which HELOCs don't.
For instance, to secure a cash refinancing at a favorable rate, you'll typically need to have a very high credit score, whereas, with a HELOC, you might be approved even if your score isn't excellent.
Top Places To Get Ice Cream In Franklin County, Florida
It's one of Florida's favorite summer treats, ice cream. From waffle cones to cones with candy toppings, it's one of those things that you can do for days on end with no slowdown.
You can have them filled with fruit or whatever floats your boat. You can have them frozen or soft serve and bottomless.
Here are the top places to get your favorite ice cream.
Sparks And Sons Grocery
This is the place to go if you want a classic ice cream shop experience. It is accessible through 119 Franklin Blvd, Saint George Island, FL 32328.
Along with ice cream, they also provide the freshest produce in the region, seafood from the area, and an excellent meat counter. Whether you are local, a "snowbird," or a first-time visitor, ensure you taste their vanilla bean, maple walnut, butter pecan, and hot fudge sundae.
Gulfside IGA Plus
If you're looking for some unique flavors, stop by Gulfside IGA Plus at 812 NW Ave A, Carrabelle, FL 32322. Their signature weekly recipes have dozens of flavors, such as their favorite pumpkin spice latte and cookies topped with delicious ice cream.
They are mostly known for their vegan-friendly options, such as pumpkin and potato-enriched treats.
Piggly Wiggly Xpress
Located at 244 Franklin Blvd, Saint George Island, FL 32328, this grocery store features an impressive selection of ice cream options and has become a popular destination for locals and tourists alike.
This full-service store is known for its top-notch cheeses and fresh local seafood. They have deep roots in this community and are committed to offering a wide range of ice cream flavors, such as mint chocolate chip, pistachio, and honey lavender lemonade. They also have a variety of toppings, like whipped cream, sprinkles, or nuts.
Cape Trading Post
Cape Trading Post is your best bet for an ice cream cone that's made just right. This shop, located at 4975 Cape San Blas Rd, Port Saint Joe, FL 32456, specializes in handcrafted ice cream cones in flavors such as strawberry shortcakes and chocolate chip cookie dough.
Beer, milkshakes, salads, shakes, and a wide range of toppings, from fresh fruit to candy bars, are all made fresh daily at the shop.
A Final Word
If you're a homeowner looking for quick credit to finance a project, you can't go wrong with a HELOC. Besides having reasonable lending requirements and flexible terms, HELOC loans charge very low interest and can be leveraged for an unlimited number of uses.
You also have the option of locking in a rate that can buffer you against paying high-interest rates in case the market rates change due to inflation.