This type of loan can help you like any other second mortgage, meaning you can use it for any purpose, such as debt consolidation, home improvement projects, or major purchases. But how do you know if this option is right for you?
Read on to learn more about how HELOC loans work in Hernando County, Florida, the benefits, and other helpful tricks.
How Does a HELOC Loan Work?
A Home Equity Line of Credit (HELOC) loan is a second mortgage that allows you to borrow money against your existing home equity for renovations, education, medical bills, and other expenses that aren't covered by traditional types of personal loans.
HELOC loan functions like a credit card such that you can borrow up to a specific credit limit set by the lender, repay the borrowed amounts plus interest, and repeat. This is beneficial because it can provide much-needed cash when you need it for various purposes.
HELOC Loan Interest Rates
One of the great features of a HELOC loan is that the interest rate you're charged can be variable or fixed. Before you decide if HELOC might be the right loan option, learning about the difference between fixed and variable rates is essential to determine which type of loan will work best for you.
Here's what you need to understand about HELOC interest rates.
Variable Interest Rates
When you take out a HELOC variable or adjustable rate loan, the interest rate will change throughout the life of your loan. The interest rate can rise or drop depending on the real estate market. If rates are increasing, your payments will also increase and vice versa.
If you want your monthly payments to stay constant over time, the adjustable option might not be suitable for you.
The variable rate is calculated from an index and margin, with an index representing a rate used by banks to determine rates on loans to the public.
Most banks in the United States reference the U.S. Prime Rate, published in the Wall Street Journal, as the index for HELOCs. This index may fluctuate, thus impacting the interest rate of a HELOC.
The second factor of a variable interest rate is a margin that is consistently applied on top of the index. It never changes throughout the loan.
Fixed Interest Rates
With the HELOC fixed rate loan, the interest rate does not change over time. You will finance the same interest rate for your entire mortgage term.
A fixed-rate mortgage can be more predictable than variable-rate loans because your monthly payments will stay constant from month to month.
If you want more stability with your monthly payments and don't mind locking yourself into one fixed interest rate for a set portion of time, consider taking a fixed-rate loan instead.
How to Apply for a HELOC Loan
When applying for a home equity line of credit (HELOC), it's essential to follow your lender's instructions to ensure you get approved!
By following these seven expert tips, you can ensure you find the right HELOC and get it approved with minimal hassles or delays.
Determine if you have sufficient home equity.
Shop HELOC lenders once you know what you can borrow.
Know what kind of interest rate you need.
Gather the documentation for your application.
Select the right lender and apply for your HELOC loan.
Carefully read through the contract before signing on the dotted line.
- Sign all the necessary paperwork and close on your loan.
How to Pay Back a HELOC Loan
Once you've used that money, your next step should be repaying your HELOC loan as soon as possible to avoid incurring fees and interest charges on top of what you already owe. Failure to pay back your HELOC could have a detrimental effect on your finances and your credit history.
The rate on most HELOCs is adjustable, so your payments may vary from what you initially planned. The lender may even foreclose on your house if you fail to repay the loan. So it'd be in your best interest to act fast as soon as you see a problem that could impact your payment schedule.
Talk with your lender, and consider changing your payment terms if need be. Be sure to search for HELOC lenders offering fixed-interest loans to let you know your payments will be the same from month to month. This can be especially helpful when planning for the long term.
After all, with careful planning and wise decision-making, you can repay a HELOC loan without damaging your reputation or finances. Generally, HELOC loan payments have two phases, including the draw period and the repayment period.
During the HELOC draw period, you'll be allowed to borrow from the credit line by transfer, check, or credit card linked to your account.
Minimum monthly payments are typically interest-only during this period, but you can also pay the principal if you wish. The duration of the draw period varies depending on the lender, but in most cases, it's ten years.
During the HELOC repayment period, you're no longer allowed to borrow against the credit line. However, you'll repay your loan monthly, including interest and principal.
With the monthly principal payments, your monthly charges will rise significantly more than during the draw period. The duration of the repayment period will vary depending on your lender, but it's often 20 years.
How to Qualify for a HELOC Loan
So how do you know you're eligible for a HELOC loan? Several factors determine your eligibility, including your current credit score, employment status, property value and location.
While you may initially believe you don't qualify for a HELOC loan, some requirements can make it much easier to be eligible and get the loan you need.
The following guide to HELOC eligibility requirements will answer all your questions and provide helpful tips and tricks on qualifying for the loan.
Home Ownership is the first requirement for a HELOC. You need to own and occupy the home you're collateralizing for a HELOC loan.
To be eligible as an owner-occupant, you must live in your home at least six months out of the year and intend to continue living there for at least one year after receiving the line of credit. If you don't own your home (especially if you rent), you cannot qualify for a Home Equity Line of Credit.
A Steady Income
A steady income is the most critical requirement for a HELOC loan. This means you must have a stable and regular income from employment or self-employment.
You'll be required to provide proof of income, including your recent pay stubs and your employer's contact information. Sometimes, the lender might require two years of tax returns before granting eligibility for a HELOC loan.
Equity in Your Home
The equity in your home is the primary factor when qualifying for a HELOC loan. Equity equals the difference between the value of your home and what you owe on your mortgage.
For example, if you owe $200,000 on your mortgage, but your home is worth $225,000, you have an equity of $25,000. You need at least 15% to 20% equity in your home to qualify for a HELOC.
Minimum Credit Score
It would be best if you had a credit score of 620 or higher to qualify for a HELOC loan, but it varies from bank to bank.
Check with your potential lender before applying for one to know your options. Your credit score will determine the interest rate and other loan terms, such as how much you can borrow and the loan duration.
The more points you have in your score (higher number), the better. Improve your credit score before working on your application to increase your chances of qualifying.
Debt-to-Income Ratio (DTI)
To qualify for a HELOC loan, your debt-to-income ratio (DTI) must be 40% or less. To calculate the percentage, total up all your monthly debt payments and divide them by your gross monthly income.
The lower the DTI ratio, the more likely you'll be approved for a loan and the higher amount you'll be able to borrow.
Benefits of HELOC Loans
Taking out a HELOC loan allows you to tap into the equity you've built in your property without giving up your home ownership. It can be the perfect solution if you need to fund major renovations, college expenses, or even an expansion of your business.
Here are just the top benefits of taking out a HELOC loan to help determine if it's beneficial for your situation.
A HELOC is an ideal way to have the ability to pay for your projects on a more flexible schedule. With a HELOC loan, you can make interest-only payments (limited to traditional loans) and pay back the principal when your cash flow allows.
This option will help you avoid making higher monthly payments than necessary while still having access to funds.
Lower Interest Rates
HELOC loans usually have lower interest rates than traditional mortgages. Lenders will offer a fixed or variable interest rate with loan terms of ten years or even 30 years.
The interest rate will range from 3.5% to 6.1%, depending on the lender, your credit score, and financial stability.
No Restrictions on How You Use the Cash
You can use the funds for anything you want, as long as it's not for personal use. This is an excellent option if you want to buy a new car, pay medical bills, renovate your home, or pay off high-interest debt. It also makes sense if you have large purchases that would strain your bank account.
You Can Borrow the Only Amount You Need
One of the best things about a Home Equity Line of Credit is that you can borrow the amount you need. You don't have to over-stretch yourself with a sizeable HELOC loan just because you have significant equity in your home.
You can borrow as little as you want to avoid paying extra interest and penalties for borrowing more than you need.
Potential Tax Savings
Interest payments on home equity programs are deductible if used to buy, build, or improve the taxpayer's home.
Even after the 2017 Tax Cuts and Jobs Act, it's still possible to deduct interest paid on your home equity line of credit or loan, as long as the cash is used for home improvements.
However, the deduction is capped to a certain threshold based on your first and second mortgage total interest.
No Closing Costs
One of the most significant benefits is that there are no down payments or closing costs since you're using your home as collateral. You can get the HELOC loan without spending money upfront or closing.
This can be especially helpful if you don't have much in your savings but would like to buy a new car or pay off some bills or debts. It also provides an excellent way to tap into your home equity and upgrade the same home to build up equity simultaneously!
Potential to Improve Your Credit Score
A home equity line of credit can help you improve your creditworthiness in various ways. Timely payments on your HELOC loan can significantly keep your interest payments low and boost your credit repayment history.
However, the HELOC's impact on your FICO score will depend on how you manage your other accounts.
HELOCs, or home equity line of credit loans, are some of the most versatile loans on the market. Because of this, they can be beneficial when you need additional funding to purchase a car or upgrade your current real estate assets in Hernando County, Florida.
Before you agree to take out this loan, however, it's crucial that you fully understand how HELOC loans work and what the benefits are to using them when refinancing your home.