In that case, you can use a HELOC to tap into the equity you have in the property to raise funds for a redesign or renovation, debt consolidation, medical expenses, or even a divorce settlement.
All HELOC consumers must, however, meet specific requirements to be eligible, just like with other loans. These include having a solid credit profile and decent equity value in one's home.
If you're interested, here's a look at the prerequisites and application procedure for a HELOC in Monroe County, Florida.
How does a HELOC work?
Homeowners can borrow money using the equity in their homes as collateral. Like a credit card, a HELOC is a revolving line of credit you can pull from as needed and reap over time.
While rules vary, a HELOC typically allows users to tap into around 80% of the equity in their home. The loan amount is determined by the difference between your home's present market value and the remaining mortgage balance. Repayment periods vary by lender but usually extend up to 30 years.
Remember that all HELOC loans have draw and payback windows, unlike credit cards. You can pull funds from a HELOC during the drawing window, which usually lasts between 5 and 15 years and is only needed to make interest-only payments.
After that, you won't be able to withdraw money and will have to make interest and principal payments throughout the payback period, which typically lasts between 10 and 20 years.
Your HELOC may also include up-front expenses such as processing fees, servicing fees, and fines for cancelation or premature closure. However, you'll pay less for a similar loan size compared to credit cards and other unsecured borrowing options.
However, learning about any additional fees connected to your HELOC beforehand is a good idea. Ask your lender to break it down for you.
That said, since a HELOC is secured against the equity in your home, the interest rate is often lower than the rates on unsecured lines of credit and other second mortgages. Moreover, you can claim the interest as a tax deduction.
Most lenders let customers take money out of their HELOCs via credit cards, checks, or internet transfers.
Requirements for HELOC
Depending on the lender, a HELOC may have the following requirements:
Equity is the sum left over after deducting the outstanding balance of all loans covered by your home from its current market value. Most lenders demand home equity in the 15-20% range. Simply divide the figure by the home's current value and multiply by 100 to get the percentage.
However, your loan-to-value (LTV) ratio, the existing mortgage balance divided by the home's present market value, will determine your HELOC borrowing limit.
While the loan-to-value ratio is the outstanding mortgage balance/home's present market value, CLTV is the outstanding balance of all loans covered by the home/home's present market value.
If you're lucky, you might be able to locate a lender that will accept CLTVs as high as 90%. However, most simply set an 85% CLTV ceiling.
Your credit record will undoubtedly be taken into consideration. Your Fico score defines your likelihood of defaulting on loan payments.
HELOC lenders require credit scores of 620 to 660, but having a higher score is more advantageous. Low credit score borrowers incur higher interest rates than borrowers with higher scores.
Your ability to make HELOC payments depends on your income. You will therefore have to present records outlining your past earnings and employment history. These include:
A solid track record of debt repayment
Since a HELOC is an extra mortgage, lenders will want to confirm that you have a solid track record of repaying debt before approving you for the loan.
It is desirable to have a low DTI. They usually require a DTI in the 43-50 percent range, but a lower DTI is even better.
Naturally, lenders can establish if you have the capacity to take on additional debt by comparing your monthly outstanding debt obligations to your monthly earnings.
75-15 HELOC for Florida condos
When looking to buy a condo in Florida, using a HELOC will allow you to limit your LTV to 75%, qualify for a limited review, and avoid a high-interest rate or private mortgage insurance requirement.
Many people relocating to FL opt to buy condos. Most of these people have already received pre-approval for mortgages in their original counties. But unlike other jurisdictions, Florida does not apply the same rules when evaluating conventional condo loans.
Indeed, FL condo purchases involving conventional loans must undergo a complete, limited, or PERS review. The type of review will depend on the amount of financing (LTV) you have on your first mortgage, combined 1st and 2nd mortgage, and type of residence (primary residence, secondary residence, or investment property).
A Breakdown of the Requirements for a Limited Review in Florida:
Primary Residence – Up to 75% LTV on your first mortgage and 905 combined LTV on your 1st and 2nd mortgage.
Second Home - Up to 70% LTV on the first mortgage and 75% combined LTV on the first and second mortgages.
- Investment Property – Up to 70% LTV on your 1st Mortgage and 75% Combined LTV on your 1st & second mortgage.
You can use a HELOC loan to meet the requirements for a primary residence - 75% financing on your first mortgage, a 15% HELOC loan, and 10% funds from personal savings.
Advantages of a limited condo review include:
Lenders cannot examine the association's budget (including the reserve money set aside).
Lenders do not require proof of fidelity bond coverage when examining condo insurance.
The lender is uninterested in the proportion of investors to owner-occupied residences.
- The condo application form is short and straightforward.
The Advantages of a HELOC
HELOC loans are advantageous in many ways. Here's a look.
Lower interest rates
HELOCs are variable-interest loans. However, even if the rates fluctuate over time, they typically remain lower than unsecured credit lines. As of August 2022, the typical interest rate for a $300,000 HELOC is 6.5%, compared to 8.73% for a similar-sized personal loan.
Meanwhile, the average APR for a similar-sized credit card loan is 15.13 percent. Obviously, among other factors, your credit score will determine the interest rate on your HELOC.
Some banks allow locking the interest rate on the outstanding balance so that you won't be vulnerable to fluctuating rates once you've built a significant debt capacity.
Although this option often comes with additional upfront costs, including a higher initial interest rate, it gives borrowers more security when borrowing costs increase.
Before choosing a lender, research and compare loan costs (including upfront costs and interest rates) from several providers and choose the best deal.
Only pay interest on the borrowed sum
HELOCs only charge interest on the amount you use. This is preferable to many home equity financing options, which demand that you take out and pay back the entire loan amount whether you need it all or not.
HELOCs are useful for projects where the total cost is not known in advance. You can take funds from your HELOC as often as you need and pay them back later.
Spend the money however you want
HELOC funds may be used any way you see fit. Typical uses include starting a business, paying for medical expenses, financing home upgrades, and clearing debt. The following are some of its benefits:
Closing expenses are minimal.
Interest that is tax deductible.
Less rigorous underwriting standards.
- When used for remodeling or refurbishment, it increases the value of a house.
Most lenders offer limited-time promotional deals to entice customers to get HELOC loans. These deals include fee exemptions, lower interest rates, rate locks, etc.
It's not wrong to take advantage of such deals; consider the total cost of the loan (fees plus interest rate) when choosing a lender.
Larger loan amount
The average HELOC loan is larger than conventional lines of credit. The amount of equity you've built up in your house, the LTV, and your income and credit history will determine how much you can draw from your HELOC.
Excellent for divorcees
During a divorce, figuring out how to compensate your ex for their ownership interest in the marital home can be challenging.
If you choose to sell the house, pay your ex-spouse and then purchase a new home, you may end up with an expensive mortgage, depending on the prevailing rates. The same is valid with refinancing.
It's not wise to do it when prevailing mortgage rates are higher than what you pay on the house. The best option is to use a HELOC.
You can tap into about 80% of the equity you've accumulated in the home to pay your ex-spouse and take care of other divorce expenses. The benefits of a HELOC here are:
The first mortgage remains intact.
Helps avoid a sale and associated costs, including agency commissions.
- Lower interest rates than unsecured borrowing options.
HELOC vs. Cash-Out Refinance
A cash-out refinance an alternative way to use your home for immediate cash. It involves replacing the current mortgage with a new one.
Depending on the difference between the new mortgage and the outstanding balance on the previous one, you might be able to get some cash out of the deal. You may use the cash however you want.
Compared to a HELOC, refinancing boasts some advantages. Generally, you should only refinance if the current rates are lower than what you are currently paying.
However, since you're receiving a brand-new mortgage, you should prepare for higher closing costs than a HELOC, which typically has lower up-front costs. In addition, you will need private mortgage insurance if the refinance results in less than 20% equity.
Applying for a HELOC
Start by comparing offers from various lenders. Avoid falling for cheap promotion tricks. That doesn't imply you shouldn't take advantage of them. Just remember to consider the total cost of the loan (interest rate plus any upfront costs).
Get your paperwork ready and send in your applications. A trip to the neighborhood branch may be necessary for some lenders, but most offer an alternative online application method.
Get your home evaluated. Lenders will have to do an appraisal to ascertain your property's current value. Be prepared to cover the cost yourself.
Prepare to close the deal. Once the lender accepts your HELOC application, you'll get details about the interest rate and the draw limit.
You can reject or accept the loan. You have a max of 3 working days to decide. If you accept the loan, an agreement paper will be presented to you for signing. The closing costs will be subtracted from the loan amount.
It typically takes 2-4 weeks to apply for and get a HELOC. However, the length of time may be extended based on the lending company and your application's complexity.
About Monroe County, Florida
Monroe County is located in southern Florida. Hundreds of years ago, the region was inhabited by Native Americans and Spanish adventurers. Today, it is home to gorgeous beaches, breathtaking landscapes, and a close-knit community of just under 75,000 residents.
Residents here enjoy zero taxes on their income, significantly lower sales taxes, and a relatively lower unemployment rate than the entire state.
The region covers 3,738 sq. miles. Almost all of the county's people live in the Florida Keys archipelago. Due to the existence of the Everglades National Park, over half of the county's land is federally protected. The county boasts wildlife refuges, 10 state parks, preserves, and historic sites.
You can enjoy the beautiful outdoors and swing into the following joints for some ice cream when conditions get hotter.
Ben & Jerry's - The Ben & Jerry's brand has an Ice Cream Shop at 124 Duval St, Key West, FL 33040. It has a reputation for having unique flavors and a commitment to using premium, ethically sourced flavors. The service is fast and friendly.
Paradise Flavors - This ice cream and popsicle store are astounding! They have several unique flavors, including avocado, watermelon/chamoy, cucumber/tajin, tamarind, pina colada, and coconut. They are all prepared fresh to order and at great prices to boot!
Jimmy Sno Concessions - If you're jonesing for the tastiest ice cream and snow cones in town, check out this roadhouse food truck. They have a delicious Hawaiian flavor with ice cream on the bottom!
Kilwin's - Kilwin's is an ice cream and fudge shop located at 505 Duval St. in Key West, Florida 33040. They offer an array of fan favorites, including caramel apple, moose tracks ice cream, milk chocolate with walnuts, and chocolate peanut butter.
- Flamingo Crossing - Whenever you are near 1105 Duval St, Key West, FL 33040, check out this shop for some of the top homemade ice creams in the county. They have flavors such as Tahitian Vanilla, passion fruit, mango, guanabana, and even crucial lime.
Is taking out a HELOC an intelligent move?
Uncertain if a HELOC is a good idea? There are some scenarios where a HELOC may be helpful.
For example, if you are looking to buy a home but don't have enough savings for a down payment, you can use a HELOC as a piggyback loan to top up your down payment fund and close the deal faster. Plus, it will expand your options, allowing you to consider bigger properties or even those in posh communities.
Moreover, if you already have a home, a HELOC enables you to access the equity for cash for debt consolidation, remodeling or renovation, medical expenses, etc.
Nevertheless, as already mentioned, a HELOC is not the only option to tap into the equity you have in your home. Other loan options may be favorable depending on your credit history, income, local property prices, and prevailing interest rates.
It would be best if you discussed your circumstances with a reputable local lender so they can crunch the numbers and assist you in making the best choice.