HELOC loans are a low-cost financing solution targeting homeowners who already have equity in their property. They are increasingly becoming popular as the key players in today’s mortgage market diversify their offerings. Compared to other solutions that let you turn equity into money, like cash-out refinancing, HELOC loans are quite cost-effective.
The lender will use your residential property as collateral for the loan. And like a credit card, you can withdraw cash from your line of credit and use it for home improvements or debt consolidation. If you plan to take a HELOC loan in Sarasota County, Florida, here’s everything you need to know.
What is a HELOC Loan?
A HELOC loan allows you to readily tap into your home equity line of credit, provided you are within certain drawing limits. The loan gives full access to a credit line while allowing you to only pay interest on the amount you spend. It isn’t available to borrowers as a lump sum like a personal loan.
The 30-year term associated with a home equity line of credit loan can be split into two. In the first ten years, you can withdraw cash from the credit line. Your lender will then expect you to clear the loan balance (only the amount spent) in the remaining twenty years.
You can also negotiate a different draw and repayment term with your lender. Either way, your loan payments will go towards the loan interest during the specified drawing period. The lender will only charge you an interest on the principal once this period elapses.
How a HELOC Works
For starters, HELOC loans are secured by the property you’ve already accumulated equity in. You can only have your lender replenish your line of credit once you pay off the outstanding debt. This means that you can take the loan over and over, provided you pay it back.
The 75-15 HELOC Loan for Condos in Florida
If your goal is to finance the purchase of a condo in Florida, you may want to consider the 75-15 HELOC loan since it is designed for this particular purpose. To be precise, this loan can offer you up to 75 percent financing on the loan (first mortgage). You can also qualify for 90 percent combined financing toward your subsequent loan.
For both financing options (75 percent and 90 percent financing) to work, the condo you intend to purchase must be your primary residence. This means that you can’t use the money to finance the purchase of a second home or a vacation home. The guidelines surrounding 75-15 HELOC loans include the following:
Approved lenders can’t review the association budget or scrutinize the amount of finance directed to the reserves.
You will need a limited condo questionnaire instead of a full one during the application.
No verification is needed by the fidelity bond coverage when the condo insurance is under review.
- Lenders don’t have to worry about the number of owner occupants or investors.
The Eligibility Criteria for HELOC Loans
While the eligibility requirements for HELOC loans are mostly lender-specific, the general rule is that you should have a certain percentage of equity in the property. Equity, in this case, refers to the amount of money remaining on your mortgage after subtracting the outstanding mortgage balance from the property’s current value. You will also need at least 15 to 20 percent equity in the home to apply for a HELOC loan.
HELOC loan limits are centered around the maximum amount lenders allow you to borrow. They reflect your loan-to-value ratio, which is your outstanding mortgage balance divided by the current home value.
Lenders also consider your combined loan-to-value (CLTV) ratio to approve you for a home equity line of credit. A maximum CLTV of 85 percent (though some lenders accept 90 percent CLTV) can improve your chances of getting qualified.
The CLTV usually sums up all secured loans on the property, including the first mortgage and other home equity loans (if any) divided by the property’s current market value. With that said, other factors that count in the eligibility of HELOC loans include the following:
Showing proof of income is a way of telling lenders that you can afford to make payments on your HELOC loan balance. You will have to submit documents that give proof of your income and employment history.
These documents may include federal tax returns for self-employed people, pay stubs and W-2s, Social Security benefits verification letters, and statements highlighting the benefits that you are already receiving.
Like other loans, a HELOC is usually centered around a borrower’s creditworthiness. The minimum credit score needed to get considered for this loan is 600. However, you can get a favorable interest rate on the loan if you have a FICO score of 700 or higher.
Outstanding Debt Amount
Your outstanding debt balances can affect your eligibility for a HELOC. In particular, a debt-to-income ratio (DTI) in the range of 43 to 50 percent will improve your chances of getting considered for this loan. DTI is usually the sum of your monthly debt obligations compared to your gross monthly income.
You need a strong loan payment history to prove to the lender that you are a less risky borrower. With a strong payment history, it’s possible to enjoy favorable terms on the HELOC loan, such as a lower interest rate. It will ascertain lenders that you can make loan payments as required.
Should Divorcees Consider HELOC Loans?
If you are in the middle of a divorce battle, you may turn to a home equity line of credit for various reasons. For starters, the loan can help you make a settlement payout to your spouse while ensuring that you still retain the interest rate on your first home loan. Lenders also allow you to lock in a favorable rate at closing while enabling you to tap into your home equity in a time of need.
It’s common for a divorce to attract unplanned expenses when it’s handled in court. For instance, the judge might ask you to give your spouse 50 percent of the equity you have in the home. In such a scenario, you can turn to a home equity line of credit if you are looking for a means to convert the equity to cash.
While it may be tempting to consider a cash-out refinance to make a divorce settlement payout, you risk getting a higher interest rate. Even more, refinancing may also reduce your home’s value. The best route to follow is the HELOC one, which gives you up to 100 percent financing on the home’s current market value.
Can You Use a HELOC Loan on Home Improvement?
One thing that makes HELOC loans great for home improvements is that they are usually issued against the current value of a property. They also come with low closing costs, giving you more flexibility to borrow and meet the eligibility criteria, unlike other renovation loans.
As you take a HELOC loan to make home improvements, the loan will be based on the equity you’ve accumulated on the home and will come with a fixed rate. Your loan limit will also depend on the property’s current value and lender-specific factors such as outstanding mortgage balance, credit score, and income.
Your lender can allow you to lock in a good interest rate on the loan for the entire repayment term once they qualify you. You get to enjoy relatively low interest rates on the mortgage with manageable fixed monthly payments.
HELOC Loans Vs. Refinancing
If you have a home loan and you are in need of money, chances are that you may have considered taking a cash-out refinance. Unlike a home equity line of credit which grants you a loan against your home equity, a cash-out refinance gives you a new home loan with a better rate after allowing you to clear the existing one.
Refinancing might not be suitable if you have already accumulated equity in the property. It comes with higher loan fees and percentage points compared to a home equity line of credit. You also have to meet strict lender-specific eligibility requirements to improve your chances of getting qualified for the loan.
A cash-out refinance offers a loan in a lump sum, while a HELOC allows you to withdraw the funds in bits as you please. Its repayment schedule is not as flexible as that of a HELOC loan.
Perks of Taking a HELOC Loan
A HELOC loan boasts less strict eligibility requirements and relatively low interest rates. You also get a chance to lock in an interest rate that will be applied over the term of the loan. Basically, here are the perks you get to enjoy with this form of financing:
Competitive Interest Rates
Finding a loan with a competitive rate when you are already paying your existing mortgage can be a bit tricky. But with a HELOC loan, you can capitalize on your home equity and get a loan with a relatively low interest rate.
On average, if the loan amount is $30,000, you may expect an interest rate of 6.5 percent, which is lower than the 15.13 percent rate that credit cards demand and the 8.73 percent rate on a personal loan.
A Chance to Lock in A Good Rate
Nothing is more attractive about a home loan than the option to lock in a rate before it changes. The good thing with HELOC lenders is that they allow you to do this once you meet their requirements. And with a locked or fixed rate, you get to pay a specific amount of interest over the course of the loan.
HELOC loans are usually available with introductory offers such as waived fees and competitive rates to capture borrowers’ attention. These offers aren’t just gimmicks since you can use them to reduce the overall loan costs.
The key to enjoying them is to shop around and choose a lender that offers lucrative introductory offers.
You Can Spend the Cash on Anything
Like credit cards, HELOC loans have the option of spending the finances bit by bit on whatever expense you like. The funds may come in handy when you want to consolidate debts, carry out home improvements, start a business or settle medical bills.
You may also enjoy certain tax benefits when you direct the finances on a home improvement project. Under certain circumstances, the interest may qualify for a tax deduction when you use the loan to give your property a facelift.
Pay for Only What You Spend
While conventional loans mandate you to repay the loan fully whether you spend all of it, HELOC loans demand the opposite. This means that you only get to pay for what you spend. For instance, if you used part of the finances to renovate your home’s roof, you only pay the portion of the cash used for this project with interest.
With this level of flexibility, a HELOC loan is ideal for a project with variable expenses. It can assure you of instant cash whenever you need to undertake such a project.
Larger Loan Limit
Home equity line of credit loans boast larger loan limits compared to personal loans and credit cards. And with a higher amount of home equity, you may qualify for a larger amount. Other factors, such as the loan-to-value ratio, also factor in the loan limit.
Relatively Closing Costs
The thought of paying low closing costs is highly appealing to any borrower used to paying higher closing costs on conventional home loans.
Besides enjoying low closing fees on a HELOC loan, you may be lucky to find a lender that offers waivers for the costs upfront under certain circumstances. Either way, you will have a lighter financial burden in the long run when taking this loan.
Applying for a HELOC
Lenders expect you to go through various steps before getting considered for a HELOC loan. These steps are quite simple and easy to follow. In Particular, you have to go through the following procedures as you apply for a HELOC loan.
Carefully compare the eligibility requirements, rates, and fees from different HELOC lenders in your area to understand your options.
You can then gather any supporting documents (bank statements or pay stubs) that the lender would need to prove your creditworthiness while filling out an application with the lender.
In the next step, the property will undergo appraisal to determine whether its value reflects the current market figures.
Once the appraisal is complete, you will now be ready to proceed to the closing stage since the lender will have approved you for the loan.
- In the final step, the funds will be disbursed to your account within three business days, allowing you to start withdrawing the funds as you wish.
The Best Five Places to Get Ice Cream in Sarasota County, Florida
Sarasota County, Florida, is full of attractions, including natural science aquariums, art museums, and water sports venues, for your unique entertainment and recreation needs. It also features the following ice cream shops that you may want to visit:
Kilwins - As an old-fashioned confectionery chain, Kilwins sells handmade sweets, ice cream, and chocolates. Their ice cream options include sugar-free and regular ones, depending on your preference. You can also find plenty of delicious desserts at the joint.
Big Olaf Creamery - Big Olaf Creamery is a colorful, compact ice-cream parlor that boasts an outdoor seating arrangement. Its menu includes creative shakes, malts, and favors to satisfy your taste buds.
Jake’s Ice Cream on Siesta Key - Jake’s Ice Cream is situated in Siesta Key Village, Sarasota, FL, known for high-quality ice cream. One of their specials is the Donut Sundae (your preferred donut with an ice cream scoop.
Abel’s Ice Cream - As an easygoing ice cream parlor, Abel’s Ice Cream offers creative homemade chocolates and scoops. They also offer plenty of options if you prefer dairy-free treats.
- Sub Zero Nitrogen Ice Cream - Sub Zero Nitrogen Ice Cream is revolutionizing the traditional ice cream shop by using science to create custom ice cream scoops. It’s a great joint to visit when looking to have yogurt or ice cream. They also offer soy and vegan options as well as dairy-free and sugar-free options.
The Bottom Line
Now is the time to fully take advantage of a home equity line of credit after learning about its requirements and benefits. Good luck getting a HELOC loan for your unique financial needs.