(Mar 30, 2023)
A traditional mortgage is the first thing that comes to mind when considering borrowing money against your home, but are you familiar with a HELOC loan? These loans are prevalent, considering that the total HELOC debt is valued at about $320 billion.
It is a much more convenient and affordable alternative to traditional mortgages and other related loan types. Here is a comprehensive overview of HELOC loans and how they work.
What is a HELOC Loan?
HELOC means Home Equity Line of Credit. A HELOC loan is a line of credit accessible to you based on your home’s equity, as the name suggests.
A HELOC loan uses the equity available in your home as collateral. Equity refers to the value of your home that is not in debt – Many lenders can give you a HELOC loan worth up to 85% of your home’s available equity.
For example, if your home is worth $1,000,000 and you have an outstanding mortgage of $500,000, then the available equity is $500,000. Based on this example, you could get a HELOC loan worth about $425,000 (85% of the $500,000 equity available in your home).
How Does a HELOC Loan Work?
A HELOC loan functions like a credit card – this is why it is referred to as a line of credit. Essentially, you can draw money from your HELOC loan whenever you need it, use it however you intend, and pay it back over time, just like using a credit card.
You also only pay interest on the money used – for example, if you drew $25,000 from your $425,000 HELOC loan, then you only pay interest on the $25,000 and pay the rest as principal.
In contrast, a traditional mortgage (and many other alternative loans) requires you to use the money as a lump sum for the intended purpose. Traditional mortgages and other loans also require you to pay interest on the entire amount, regardless of whether or not you drew and used it.
Besides functioning like a credit card, a HELOC loan is also characterized by three other main aspects, including:
Interest Rates
Interest rates are categorized into two types - fixed or variable. A fixed interest rate doesn’t change despite changes in the market. In contrast, a variable interest rate changes as the market changes – it is based on the market’s prime interest rate, which rises or falls regularly depending on factors such as economic performance.
HELOC loans are based on a variable interest rate based on the market’s prime rate. This means that the monthly payments vary depending on the prime interest rate – they can increase or decrease if the interest rate rises or falls.
However, it is worth noting that some lenders can allow you to lock in a fixed interest rate on a fraction of your outstanding HELOC loan. It is also worth noting that HELOC loans usually have lower interest rates than traditional mortgages and personal loans.
Draw & Repayment Periods
A HELOC loan has two phases - a draw and a repayment period. The draw period is for drawing money from your account, while the repayment period is for paying the HELOC loan back.
You can draw money from your HELOC line of credit during the draw period. This period usually lasts ten years. It is worth noting that there is a limit to how much money you can draw from your HELOC loan, even if the draw period is still active – you cannot continue drawing money when you reach the limit unless you pay back some of the used money in principal and interest.
The repayment period is dedicated solely to paying back the HELOC loan, including principal and interest on the used money. It usually lasts about 20 years, albeit some lenders can let you negotiate an extension.
Repayment Plan
HELOC loans have conveniently flexible repayment plans. First, you only pay interest on the money drawn from the line of credit and pay the unused money as principal.
Second, you can make monthly interest-only payments for the money drawn from your account and pay off the principal later – you can also make monthly interest-pus-principal payments to reduce your overall debt.
Your lender expects you to pay off the entire loan by the end of the repayment period. However, you could still have an outstanding debt (usually principal) after repayment. You have two options - clear the balance in one lump-sum payment, or negotiate an extension with your lender.
The 75-15 HELOC Loan for Condos – How Does It Work?
HELOC loans are available for all property types. However, condos qualify for a particular type of HELOC loan known as the 75-15 HELOC – more precisely, it is known as the 75-15-10 HELOC condo loan.
75-15-10 are percentages used to designate the following payments:
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75% of the condo’s value for the primary mortgage.
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15% of the condo’s value for the HELOC loan.
- 10% down payment for the loans.
Condo mortgage interest rates usually increase when the mortgage exceeds 75% of the condo’s value, making the 75-15-10 HELOC loan convenient for condo owners. You can finance up to 90% of their condos’ value using the first mortgage and HELOC loan.
75-15-10 HELOC loans are also convenient because the review process is relatively flexible and accommodating. For example, lenders don’t need to verify the fidelity bond coverage when reviewing the condo’s insurance.
They also don’t need to review the funds directed to reserves or analyze the association’s budget when verifying your eligibility for the loan. Overall, the questionnaire is limited only to essential questions.
Applying for a HELOC Loan – Requirements & Application Process
Qualifying and applying for a HELOC loan is easier than other loans because it uses your home’s equity as collateral. Here is an overview of the requirements and a brief step-by-step guide through the application process.
Requirements
You must meet the following requirements to qualify for a HELOC loan in Madison County, Florida:
15% Equity
You can take out a HELOC loan as a second mortgage if you still have equity available in your home. However, the available equity must be at least 15% of your home’s value.
For example, if your home is valued at $1,000,000, the available equity must be at least $150,000. It is worth noting that having more equity gives you access to a larger loan and affords you leverage to negotiate better terms and interest rates.
43% Debt-to-Income Ratio
Debt-to-income (DTI) ratio is your total debt divided by your monthly income. Lenders use the DTI ratio to assess your ability to pay your HELOC loan.
Most lenders in Madison County require borrowers to have at least a 43% DTI ratio – however, a lower debt-to-income ratio can help you negotiate better terms and lower interest rates. It is worth noting that you can lower your debt-to-income ratio by paying off some of your debts.
85% Loan-to-Value Ratio
Loan-to-value (LTV) ratio refers to the size of your loan compared to your home’s value. Most lenders in Madison County require a maximum LTV ratio of at least 85% - a lower LTV can give you leverage to negotiate better terms.
620 Credit Score
Your credit score is significant because many lenders use it as a baseline for assessing your qualification for any loan – a higher credit score gives you leverage to negotiate lower scores and better terms.
Lenders also require borrowers to have a credit score of at least 620. This is relatively low, considering that most other loans require higher credit scores.
Step-by-Step Application Process
Applying for a HELOC loan is quicker and easier than applying for most other loan types, including mortgages. Here is a step-by-step guide:
Step 1 - Determining Your Eligibility
Most lenders will reject your application if you don’t qualify. This is why you must ensure you meet all the earlier requirements before applying. Fortunately, you can meet most of these requirements by paying down your debts.
Step 2 - Calculating Your Equity
One of the requirements for qualifying for a HELOC loan in Madison County is that the available equity in your loan must be at least 15% of your home’s value.
Calculating your home’s available equity can be easy or complicated, and it is always advisable to consult a professional or use professional software. It is worth noting that you can increase your home’s equity by paying down your primary mortgage.
Step 3 - Finding a Lender
Different lenders have varying terms and policies on lending and loan repayment. For example, some lenders charge higher interest than others.
Some lenders also have strict terms, while others can allow you wiggling room to negotiate for better terms. It is vital to find a lender with the best terms and offers, so shop around and review different offers.
Step 4 - Applying
Applying for a HELOC loan is the most critical part of this process. It is essential to fill out the lender’s documents and questionnaires and provide all the necessary financial documents.
Commonly requested financial documents include your tax returns and bank statements. It is worth noting that the underwriting and review process can take several days or weeks.
Step 5 - Reviewing Offers
Depending on your qualification, your lender will make you an offer and send you disclosure documents. It is important to review these documents and the lender’s offer thoroughly before signing – you should mainly focus on factors such as interest rate and repayment terms before accepting the offer.
Uses of HELOC Loans
One of the most convenient things about a HELOC loan is that you can use the money for virtually any purpose, just like a credit card. Here is an overview of some of the most common uses of HELOC loans:
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Home Improvement - Many people use HELOC loans for home repair and improvement projects that require a lot of money. Interestingly, home improvement helps increase your home’s value, thus increasing the available equity.
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Education Expenses - You can also use your HELOC money for education expenses. Such expenses include tuition fees and college loans. It is worth noting that a HELOC loan can sustain you throughout your cause and beyond because draw periods usually last ten years.
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Medical Expenses - Many people also use HELOC loans to settle medical expenses. HELOC loans are incredibly convenient for this purpose because of the short review process.
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Business Expenses - You can also use your HELOC loan on your business, which would be a prudent investment to sustain your income to enable you to repay the loan. You can use the money to start a new business or strengthen an existing one.
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Divorce Settlement - HELOC loans are also convenient for settling divorces. You can leave the primary mortgage intact without refinancing and potentially losing a reasonable interest rate.
- Debt Consolidation - Debt consolidation is one of the most common uses of HELOC loans. Using a HELOC loan to pay off other loans is prudent because it comes with relatively low-interest rates and flexible repayment terms.
Benefits of HELOC Loans
HELOC loans have many benefits over traditional mortgages, personal loans, and other alternative funding solutions. The most notable benefits include the following:
Easy Requirements
HELOC loans in Madison County have relatively lax requirements than traditional mortgages and other loans. For example, you need only 15% equity in your house, which is considerably low compared to traditional mortgages.
It is also worth noting that meeting most of these requirements entails paying down your debts, making it easy to qualify for a HELOC loan.
Quick Application & Approval Process
Lenders usually take more than a month to review applications for traditional mortgages. In contrast, the application and review process for HELOC loans can take several days or weeks, thanks to the lax requirements.
It is advisable to prepare all the necessary documents and provide the relevant information for quick review and to increase the likelihood of your application approval.
Low-Interest Rates
HELOC loans have relatively lower interest rates than traditional mortgages and personal loans, making monthly payments affordable (especially when the prime rate falls).
It is also worth noting that while most HELOC loans are based on variable interest rates, some lenders can let you lock in a fixed rate on a fraction of your outstanding loan balance.
Flexible Repayments
HELOC loans usually have two monthly repayment options - interest-only or interest-plus-principal payments.
Interest-only payments are minimal and usually granted during the draw period, while interest-plus-principal payments usually kick in during the repayment period. You can also make interest-plus-principal payments during the draw period to pay down your debt.
Flexible Terms & Conditions
HELOC loans’ terms and conditions are also usually conveniently flexible. For example, you can opt for your preferred repayment option - interest-only or interest-plus-principal payments.
You can also negotiate for an extended draw and repayment period. Most notably, you can lock in a fixed interest rate into a portion of your HELOC loan balance.
Flexible Uses
You can use the money from your HELOC loan for any purpose. This is why HELOC loans are convenient as a source of quick money for expensive projects such as home improvement, education, and hospital payments, among other uses.
Celebrating Your HELOC Loan – Top 5 Ice Cream Shops in Madison County, Florida
Have you qualified for a HELOC loan in Madison County, Florida? You deserve to treat yourself to something good to celebrate your loan approval – after all, it is one of the most convenient loans you can get.
Whatever your idea of celebrating, everyone likes ice cream. Here is an overview of five of the best ice cream shops in Madison County, Florida:
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Dairy Queen Treat – 6390 FL-53, Madison, FL 32340
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Bob & Jim’s Fresh Market – 739 E Base St #654, Madison, FL 32340
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Winn-Dixie – 729 W Base St, Madison, FL 32340
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LB Feed & Country Meat – 118 SE Bennett St #2667, Madison, FL 32340
- Cherry Lake General Store – 8061 FL-53, Madison, FL 32340
All of these ice cream shops serve a bewildering range of ice cream flavors, including your favorite. However, don’t lose sign of the goal - putting your HELOC loan to good, profitable use.
Apply for a HELOC Loan Today!
A HELOC loan is a convenient source of funding when you need quick cash for any purpose, from house improvements to paying off education and medical expenses.
Fortunately, it is easy to qualify for a HELOC loan, and the flexible terms and conditions make repayment easy. However, ensure that you find a reliable and trustworthy lender that will give you the best offer under the best terms.
(Mar 30, 2023)
