If you're interested in learning more about how to qualify and apply for a HELOC, here's a look.
How does a HELOC work?
A HELOC loan is often obtained as a second loan, in addition to the primary mortgage, to finance the purchase of a home. It's typically used to lower the upfront costs of a mortgage, i.e., expenses such as the down payment and private mortgage insurance.
For example, if you want to use a loan to buy a house, most lenders will only give you 80% of the property's assessed value. That means you'll have to come up with the remaining 20%. However, most homebuyers raise the 20% in cash without exhausting one's resources, particularly during rapidly rising housing prices.
But with a HELOC, you can take out an additional 10% of the home's assessed value, meaning you only need to raise the remaining 10% on your own. In this case, the HELOC is a 2nd mortgage that piggybacks on the primary mortgage.
You can also apply for a HELOC if you already own a home and want to use it to secure a loan for various purposes. A HELOC allows individuals to meet their down payment expenses, take on renovation or remodel projects, pay medical bills, consolidate debts from other sources, etc. You can use the funds from a HELOC for anything.
Most banks allow borrowers to access funds from their HELOCs using checks, credit cards, or online transfers.
This type of credit will have a draw and repayment period, which is unusual for credit cards. You only incur interest on the money borrowed.
The phases of HELOC
You can draw as much as you need up to your credit limit during your HELOC draw cycle, typically 10 to 15 years, but you must make interest-only payments.
You won't be allowed to withdraw money when the draw period is up; instead, you'll be required to pay back the borrowed sum plus interest.
The HELOC repayment period usually lasts 10 to 20 years. That means you'll have to make regular interest-plus-principal payments until the loan is all paid off. As a result, you'll pay more than you used to during the drawing window.
Your HELOC may include upfront fees such as registration fees, service charges, and cancelation or early closure fees. However, you'll spend less on financing expenses for a comparable loan amount than you would with unsecured borrowing solutions such as credit cards.
Nevertheless, to be better prepared, it's wise to ask your lender about any additional fees you can expect on your HELOC.
The interest rates on HELOCs are often lower than other common types of second mortgages because HELOCs are secured against the borrowers' homes. Furthermore, the interest can be tax-deductible, helping you reduce your taxable income.
The conditions for a home equity line of credit vary depending on the lender. The guidelines, however, are the same. Here's a look;
HELOC borrowing is determined by the ownership you have in your house, i.e., how much of the home's value you control compared to the portion controlled by the mortgage company.
To estimate your home's equity, you'll need to determine its current market value and the outstanding mortgage. Then, divide the second by the first. Most lenders require that you have 15-20% equity in your home.
However, the amount you can borrow is not based on the home's equity. Lenders frequently use the loan-to-value ratio to determine a credit limit, which is the mortgage balance divided by the home's current value.
The combined loan-to-value ratio, or CLTV, is a metric that compares the total amount of debt secured against a home to its fair market value.
Most lenders only allow HELOCs for borrowers with CLTVs of up to 85%, although some accept CLTVs as high as 90%.
Your credit profile will undoubtedly be a factor. Your credit rating determines your risk level.
Most lenders want FICO scores of between 620 and 660, but a higher number will help you even more. Lower scores typically receive higher interest on their HELOCs and vice versa.
Lenders will examine your income to determine if you can afford the loan's monthly payments. You will therefore need to present documentation showing your income history. These include:
Strong Debt Payment History
Banks will also want to check your debt payment record because a HELOC is an additional mortgage, and they'll want to verify that you can reliably pay it back.
DTIs between 43 and 50 percent are preferable. Naturally, your debt-to-income ratio, or DTI, determines whether you can afford to shoulder more debt by comparing your total monthly debt to your monthly income.
HELOC 75-15 for condos in Florida
Many people moving to Florida from other regions are purchasing condos. Many of these people have already received mortgage pre-approval where they're coming from. However, Florida doesn't follow the same rules when evaluating conventional loans for condos.
There are three reviews for condo purchases in Florida - total, limited, and PERS. A full review thoroughly examines the entire financial situation of the condo. On the other hand, a limited review doesn't take a deeper look into the financial aspects of a condo.
Consequently, completing a limited review and obtaining bank approval for a condo purchase is simpler and more manageable.
In a limited review:
Lenders aren't allowed to look into the condo association's spending plan. This means they can't examine things like reserve allocations, etc.
Lenders do not require proof of fidelity bond coverage when reviewing condo insurance.
Lenders do not have to worry about the ratio of investors to owner-occupants.
- You won't have to spend much time on the condo questionnaire because it is short.
To be eligible for a limited condo purchase review in Florida, you must have 75% max financing on your primary mortgage and 90% total financing on your primary and secondary mortgage.
This can be done by obtaining a second mortgage as a HELOC for 15% of the condo's value and raising the remaining 10% on your own. This will give you a condo purchase strategy of 75-15-10.
Limiting the principal mortgage to 75% of the condo's value helps avoid higher interest rates associated with higher LTVs.
The Advantages of a HELOC
HELOCs are one of the most popular low-cost borrowing options. These loans, which are secured against the equity borrowers have in their homes, are favorable in the following ways:
Lower interest rates
Compared to unsecured credit options, HELOCs often have cheaper interest rates. As of August 2022, borrowing $30000 carries the following average interest rates depending on the loan type:
- HELOC - 6.5%
- Credit cards - 15.13% (average APR)
- Personal loan - 8.73%
Of course, the interest rate on your HELOC will depend on your credit history, among other factors.
HELOCs often feature variable interest rates. But even if the rates fluctuate over time, they generally remain lower than conventional lines of credit.
A lock rate is possible
Some lenders allow you to fix or lock the rate on the outstanding debt so that you won't be exposed to fluctuating interest rates once you've racked up a balance.
Even though this option is uncommon and sometimes comes with extra fees or a higher initial interest rate, it gives homeowners more protection in an environment where interest rates are exploding, like the one we're in now.
However, before choosing a lender, shop around and evaluate several providers' loan expenses (including closing costs and other upfront fees).
Only the money you borrow incurs interest
A HELOC is an open line of credit, meaning you only take out what you need and avoid incurring interest on any money you don't use.
This is advantageous compared to other lines of credit, where you must take out and pay interest on the full loan amount, even when you don't need all of it.
Spend the money on whatever you like
You are free to make any use of the HELOC funds. Typical uses include paying off debt, starting a business, paying medical expenses, and financing home improvements. It has several benefits, such as;
Little to no closing expenses.
The interest paid is tax deductible.
Flexibility in terms of borrowing and paying back the money.
Enhances/increases a home's worth.
Less stringent underwriting standards.
- Unlike a remodeling loan, a HELOC is based on the current value rather than the home's future value.
Most HELOC lenders offer promotional deals like waived fees or lowered interest rates for a set period to encourage customers.
While you shouldn't choose a HELOC lender based on the availability of incentives, taking advantage of such offers isn't bad as long as the lender is the best overall in terms of the total loan cost.
Greater loan amount
The average HELOC loan is larger than conventional lines of credit. Of course, the amount of equity you have in your property will determine your HELOC borrowing limit.
The majority of lenders need an LTV of 80%. Other factors determining a credit limit include the borrower's income and credit profile.
Great for divorcees
Divorce is painful in many ways, and it's even more stressful when figuring out how to compensate your ex for their equity share in your home. Of course, you can always sell the house, pay your ex, and buy another home.
But under the present conditions, you'll likely end up paying a higher interest rate on your new mortgage. Given the current high-interest rates, refinancing is also not a viable option.
Using a HELOC loan instead is more advantageous.
You can borrow against the house to pay your ex while leaving the primary mortgage intact.
You may be able to lock in or fix the HELOC interest rate.
It helps avoid a sale and incur costs such as agent commission.
- Lower interest rate than conventional borrowing.
Cash-Out Refinance vs. HELOC
A HELOC is not the only way to use the equity in your home for immediate cash. You can also do a cash-out refinance. In this case, you switch your current mortgage for a brand-new loan.
If the new loan is more than the outstanding balance on the previous one, you may be able to make some money out of the deal. You can use the money to pay off debt, settle medical bills, upgrade your home, etc.
Compared to a HELOC, refinancing has several benefits. Generally speaking, you should switch to a new mortgage if the prevailing rates are lower than what you are currently paying.
But since you're receiving a new primary mortgage, you should expect higher closing costs than HELOCs, which typically don't have high up-front costs. Additionally, you might be forced to get private mortgage insurance if the equity in your house drops below 20% after the refinance.
Making a HELOC application
Start by getting offers from different lenders and comparing them. Don't let marketing offers fool you. But also, that doesn't mean you shouldn't try to take advantage of any incentives available. Remember to consider the actual cost of the loan (fees plus interest).
Next, prepare your paperwork and complete any applications that are required. While visiting the neighborhood branch may be necessary for some big banks and credit unions, most lenders provide an alternate online application method.
Has your home been evaluated? Lenders usually recommend an appraisal to ascertain the present value of your home. Most lenders will arrange for the appraisal themselves, but be prepared to pay the appraisal fee yourself.
Prepare to close the deal. If your HELOC application is granted, your bank will let you know the interest rate and credit limit. If you accept, you'll be asked to sign an agreement. Any closing costs will be integrated into the loan amount.
Get your money. You have three working days to change your mind and terminate the loan if you want. Otherwise, you can pull money from your HELOC whenever you want.
How long does it take to get a HELOC?
The application for a HELOC and the closing process typically takes 2-4 weeks. That said, it could also take up to 6 weeks, depending on your bank and your application's complexity.
Is Orange County, Florida a great place to live?
Yes, Orange County is a great place to live. It comprises 13 cities, 200 public schools, 170 private schools, and many respected higher learning institutions. The unemployment rate is lower than the state and national averages, and more than 160 distinct occupations and job kinds are available.
The Boeing Company, Bank of America, Walmart Stores, Florida Hospital, Walt Disney World, and Universal Resorts are some of the top employers.
The county's diverse population as evident in its cuisine, culture, arts, and entertainment scene. For example, here are the best places in the county to get ice cream.
- Ginther's Swirls Ice Cream
- Cold Stone Creamery
- The Greenery Creamery
- Ice & Bites Cafe
- Kelly's Homemade Ice Cream
Is a HELOC loan an intelligent choice?
Not sure if a HELOC loan is the best course of action? Well, this piggyback loan is ideal in various scenarios. For example, if you lack enough resources for the down payment on your home, use a HELOC to top up what you have so you can close the purchase faster.
A piggyback mortgage will also expand your options, i.e., you can look at bigger homes or even properties in posh neighborhoods.
Furthermore, if you already own a home, a HELOC offers a way to tap into the equity you have in it to raise funds for a renovation or remodel, medical bills, divorce settlement, etc.
Your choice between a HELOC and other lines of credit will generally depend on your financial status and the cost of properties in your area. However, as already mentioned, many alternatives exist to a home equity line of credit.
Talk to a loan officer and ask them to run the numbers so you can get an accurate picture of which loan to choose.