(Mar 27, 2023)
In this article, you'll learn everything you need about HELOC loans, how they work, and why they are more advantageous than cash-out refinancing.
What Are HELOC Loans and How Do They Work?
A home equity line of credit (HELOC) loan is a second mortgage secured against the value of your home equity. This line of credit differs from a traditional mortgage in that you receive a revolving line of credit rather than a lump sum payment.
HELOC loans operate similarly to credit cards because you can pull from the line of credit at any time during the draw period, up to your credit limit. You have full access to the credit line after closing and can withdraw as much or as little as you want while only paying interest on the amount you spent. This differs from installment loans such as personal and home equity loans, wherein you get the credit in a single lump sum payment and must pay interest on all of it.
HELOC loans are typically structured over a 30-year term. Once you open a HELOC, you'll have a 10-year draw period during which you can withdraw against your HELOC limit or utilize your HELOC card or checkbook to pay for expenses.
During this time, you can also start paying back your principal. You are only required to pay interest on the amount you withdraw during the draw period, and no interest is levied on the remaining portion of your credit line.
When your draw period expires, you will enter a 20-year repayment period during which you cannot make any further withdrawals. On the contrary, you'll be required to start making monthly interest and principal payments on your HELOC balance.
Eligibility Requirements For HELOC
Several qualification requirements must be met to be approved for a HELOC loan. These include:
Credit
When qualifying for a HELOC loan, lenders will consider your credit score to assess whether you're a high-risk borrower who is likely to miss payments.
Although different lenders will have varying credit requirements, you stand a better chance of getting approved if you have a FICO score of 680 or more.
An added advantage of having a high is that it increases your chances of getting this second mortgage at lower interest rates.
Equity
In the context of mortgages, equity refers to how much stake you have in your home. To put it another way, it's the difference between what you owe on your mortgage and the home's current value.
To qualify for a HELOC loan, you need at least 15% to 20% equity in your home. You should also remember that the limit your lender offers will largely depend on your loan-to-value ratio (LTV). To calculate LTV, divide your mortgage balance by the market value of your home. An LTV ratio of 80% or less is recommended when applying for a HELOC loan.
Another metric that lenders will look at when determining your HELOC limit is your combined loan-to-value ratio (CLTV). This essentially refers to all your debt on the property about its market value. Most HELOC lenders typically expect a CLTV no greater than 85%, although it's still possible to be approved for a CLTV of up to 90%.
Income
When you apply for a HELOC loan, your lenders will want to know if you have enough income to make the payments. As a result, you will be obligated to provide supporting documentation of your income and employment status.
Here are some of the documents that your lender might request from you:
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Recent pay stubs and W-2 forms
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Recent federal tax returns
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1099 forms
- Verification letter from your Social Security account
DTI
Your debt-to-income ratio (DTI) is another critical parameter that lenders will look at when assessing your eligibility for a HELOC loan. Evaluating your DTI gives your lender a general idea of how well you're handling your debts and whether you're in a position to manage additional debt.
To qualify for a HELOC loan, your DTI should be no more than 50%. That said, it's worth bearing in mind that some lenders may require a much lower DTI to qualify you for a HELOC loan.
Understanding The 75/15/10 HELOC for Condos
As highlighted at the outset, a HELOC loan is a second mortgage, which means you can use it to finance some home purchase costs. For instance, if you're looking to buy a condo in Florida, one of the best ways to finance the purchase using a HELOC is by taking out a 75/15/10 piggyback mortgage.
A piggyback mortgage is a second mortgage that you obtain concurrently with your primary mortgage to finance the remainder of the home purchase. A piggyback mortgage is the best option if you want to buy a condo but don't have enough money for the expected large down payment.
Furthermore, taking out this second mortgage concurrently with your primary mortgage excludes you from needing to pay private mortgage insurance (PMI), which saves you a significant amount of money over the life of your loan.
Under the 75/15/10 piggyback arrangement, your primary mortgage represents 75% of the home's total value; your HELOC takes up another 15% of the home's value. This gives you combined financing of 90%, and the remaining 10% is the down payment you'll pay out of pocket.
Should You Get A HELOC For Divorce?
Even in the most favorable of circumstances, divorces can be complicated to navigate, especially when figuring out how to distribute home equity to your spouse.
You might consider several options when deciding how to split home equity with your ex-spouse after a divorce. First, you have the option of selling the house, but this move can see you lose up to 10% of the home's value through agent commissions and other fees.
Furthermore, once the divorce is finalized, you'll need to start thinking about buying a new house which means incurring additional mortgage expenses in the form of monthly payments and closing costs.
Alternatively, you can opt to do a cash-out refinancing. However, this will likely cause you to pay more interest rates.
If neither of these options seems too appealing, your best bet would be to seek a HELOC to help you pay out your spouse. A HELOC loan provides you with a line of credit without impacting your primary loan. This means that taking out a HELOC for a divorce settlement will still leave your primary mortgage intact such that you and your ex-spouse will still be required to jointly make payments on the mortgage (assuming they're listed as a co-borrower).
Another benefit of using a HELOC for a divorce settlement is that you can borrow up to 100% of your home's equity, which is more than you can get with cash-out refinancing. Furthermore, most lenders will allow you to lock in a portion or all of the HELOC, so you don't have to pay high-interest rates.
Can I Use A HELOC For Home Renovations?
Yes. A HELOC loan offers the best financing option if you want to make ongoing improvements to your home. HELOCs, like credit cards, permit you to borrow money up to a specific limit depending on your home's equity.
With an established HELOC account, you can withdraw funds to fund your remodeling project and only pay interest on the amount you withdraw. This provides you with a great deal of borrowing and repayment flexibility.
Furthermore, unlike credit cards, which typically charge exorbitant interest rates, you can get a HELOC loan with a much lower interest rate, thus making it possible to remodel your home and increase its market value without spending too much.
An added advantage of utilizing a HELOC loan for your home remodeling project is that the interest you pay on the loan may be tax deductible. In other words, if you're purely using the loan to increase the value of your home, you can deduct the loan interest on your annual tax returns.
Advantages Of HELOC Loans
HELOC loans offer many benefits you won't find in other forms of credit, such as home equity loans and cash refinancing. These include:
You Can Utilize The Credit However You Like
Arguably the most significant benefit of HELOC loans is that they do not come with any restrictions in terms of usage, which means you can use the loan however you wish.
Even though your home backs this second mortgage, you are not necessarily required to use it to finance the purchase or renovation of your home. Instead, you can use it to pay off other high-interest debts, invest in a business or even buy a car.
Nevertheless, just because you're at liberty to utilize the money in any way you wish doesn't mean you should spend it irresponsibly. Remember that your home secures this loan and opens you up to the risk of foreclosure should you fail to repay it as required by your lender.
They Offer High Credit Limits
A HELOC loan provides you with access to a lot more credit than you would with a personal loan or credit card. These loans are ideal for financing significant expenses such as home improvements and debt consolidation.
You Can Enjoy Lower Interest Rates
Unlike credit cards and personal loans, which usually charge very high interest of up to 12%, HELOC loans generally carry very favorable interest rates that can be as low as 3%.
Your home backs these loans and incentivizes lenders to offer them at low interest. You can also increase your chances of enjoying an even lower interest rate if you have a good credit score and low DTI.
They Provide Flexibility In Terms Of Borrowing and Repayment
As initially highlighted, HELOC loans allow you to borrow money in the required amounts and pay only what you utilize. This makes them a convenient and cost-effective financing option for ongoing expenses.
You Can Lock In A Rate After Closing
Some HELOC lenders provide fixed-rate options, allowing you to lock in a portion of your HELOC balance at a fixed interest rate for a set period of time. This protects you from potentially high-interest rates caused by market factors such as inflation.
Why Is HELOC Better Than Cash Refinancing?
Whereas HELOC loans provide a revolving line of credit, cash refinancing involves borrowing a larger mortgage to replace an existing one, giving you some extra cash.
Cash refinancing, just like HELOC, enables you to cash out some of the value of your home. Even so, when compared to HELOCs, cash refinancing has several drawbacks that you need to be aware of.
The main downside to cash refinancing is that it comes with relatively higher interest rates and closing costs compared to HELOC. Similarly, cash refinancing has stricter lending requirements and a complicated underwriting process. You'll invariably need a high credit score and a low LTV ratio to get a good deal from your lender.
Top 5 Places To Get Ice Cream In Pasco County, Florida
It's no secret that daytime temperatures in most counties in Florida can rise pretty high, particularly during the summer months, and Pasco County is no exception. Fortunately, Pasco County is home to many top-rated shops and parlors that you can visit for refreshing ice cream on a hot day.
Here are some of the best places to get ice cream in Pasco County, Florida:
The Ice Cream Palace
Located in west Pasco County, Florida, The Ice Cream Parlor is an ice cream shop operating since 2012. The establishment is popular with locals for its excellent customer service and extensive ice-cream menu with over 40 flavors.
In addition to delightful scoops, The Ice Cream Palace also serves an assortment of beverages, including Root Beer Float, Malt, Milkshakes, and Smoothies. The establishment also offers delivery services within the area.
Ice Dreammm Shop
Located in Lutz, close to south Pasco, Florida, Ice Dreammm Shop offers premium homemade ice cream in a wide variety of unique flavors, including Chocolate Bacon Toffee, Rum Haven, and Fireball Applepie.
Ice Dreammm Shop also serves various snacks such as candy, chocolates, cookies, nuts, and more. The parlor is set in a serene and quiet location with spacious sitting areas and friendly staff.
Ottaway's Parkside Ice Cream Parlor
Ottaway's Parkside Ice Cream Parlor in downtown New Port Richey is an old-fashioned ice cream shop with a charming atmosphere, friendly staff, and delicious ice cream.
It has an excellent selection of ice cream flavors, sundaes, smoothies, milkshakes, and snacks like cake pops and edible cookie dough. The prices are reasonable, and the establishment has elegant indoor and outdoor seating areas.
Lutz Scoops
Lutz Scoops offers delicious homemade ice cream with many fantastic flavors and toppings. While the shop has a tiny indoor and outdoor seating area, its ambiance is very welcoming, and the staff is family-oriented.
Twisty Treat
Twisty Treat is an ice cream shop in St. Dade City, Pasco County, with an illustrious history that goes back three decades.
Since it first opened its doors in 1991, the shop has established itself as a household name in the local community thanks to the delightful offerings of ice cream, sundaes, milkshakes, and soft serves.
Wrapping Up
When it comes to credit options for homeowners, it certainly doesn't get any better than HELOC loans. HELOC offers unrestricted usage of your credit and gives you a lot of flexibility since you only borrow what you require and pay interest on what you spend. You also enjoy incredibly lower interest rates than you would with a credit card or personal loan.
(Mar 27, 2023)
