(Mar 26, 2023)
Understanding how this loan option works will help you know whether or not it will work well for you. Read on to find everything you need to know about HELOC loans.
What is a HELOC Loan?
A home equity line of credit (HELOC) provides a line of credit from which you can borrow money as the need arises. Depending on your home equity, your lender will often give you the maximum amount you can borrow.
Home equity represents the difference between your home's present market value and your remaining mortgage loan balance.
This line of credit serves as a second mortgage type, offering you the cash you can use for different purposes. Usually, you can access up to 80% of your home equity. Depending on your lender, you can have repayment terms of up to 30 years.
HELOCs often work like credit cards as you have variable interest rates. Besides, you can also pull off repeatedly from this line of credit and make payments. However, unlike a credit card, the loan terms are split into a draw and repayment period.
The draw period usually lasts for up to 10 years. You can make withdrawals on your line of credit during this period and only make minimum interest payments. Later, you'll move from 10 to 20 years to the repayment period. You can't make further withdrawals and typically must make total payments on the borrowed amount.
Remember that lenders will try to keep your loan-to-value ratio below a specified percentage. Therefore, you won't borrow against all the available home equity. Lenders always prefer that you have some remaining equity in your home. In this way, you're less likely to default on your loan.
Qualification Requirements
Usually, lenders require you to meet specific qualification criteria before approving you for this loan. Different lenders have different eligibility requirements.
However, the typical requirements include:
Reliable income
Prepare sufficient documentation to illustrate your income and employment information. Most lenders will request proof of income to ascertain that you can clear your loan. Essentially, lenders need assurance that you can afford repayment.
Income and accompanying paperwork include documents like your recent W-2s and pay stubs. Besides, self-employed borrowers need to provide their most recent federal tax returns. A benefits verification letter, benefit statements, and retirement award letters can prove your income's reliability.
Good Credit
Your credit score and history indicate the risk you'll expose to your lender. Good credit indicates that you pose less risk to your lender and increases your chances of getting loan approval. A credit score above the mid-600s increases your chances of getting approval. However, some lenders require a credit score above 700.
Good credit also ensures that you qualify for a better interest rate. It is always helpful to build your credit score before applying for this line of credit.
Sufficient home equity
Most lenders require that you have at least 15% -20% home equity before approving your loan. However, remember that you cannot borrow an amount that exceeds your loan limit, regardless of how much equity you have. Often, your loan-to-value (LTV) influences your loan limit.
Some lenders also assess your combined loan-to-value (CLTV) ratio before approving your loan. This ratio usually compares all your secured loans against the home's value. Most lenders only offer approval to borrowers with a CLTV that is below 85%. However, some lenders might tolerate CLTVs as high as 90%.
A Responsible payment history
Lenders usually evaluate your payment history to determine whether or not you are a responsible borrower. Your payment history indicates your risk of default, along with whether or not you make any late payments on your loans.
Solid payment history will also translate into a good credit score with additional benefits. Overall, lenders always need to know that you can reliably repay the amount you owe.
A Low Debt-to-Income Ratio
Your debt-to-income ratio indicates whether you can take on new debt obligations. With HELOCs, a lower DTI is always ideal. A higher DTI indicates that you are straining your current income and might not quickly clear any new debts.
Typically, a DTI ratio that is between 43% to 50% is sufficient to earn you a HELOC loan approval. Remember to discuss with your lender to determine their specific qualifying DTI ratios.
HELOC Phases
HELOCs usually have two phases that separate borrowing from repayment. These phases are the draw and repayment period, which cover 30 years.
The Draw Period
During the first phase, your line of credit is usually available for use. You can borrow as much as you need while remaining within your loan limit. Also, you'll need to make minimum or interest-only payments on the borrowed amount. Often, the draw period lasts for ten years.
What if you reach your limit before the draw period ends? You'll have to refinance your loan if you need a draw period extension. You can pay off part of the loan to keep borrowing.
The Repayment Period
Once the draw period elapses, you won't have access to the funds. This period usually covers the remaining 20 years of the loan's 30-year term.
Besides, you'll start making monthly payments to cover your principal loan amount and any accrued interest. Often, your payments will go up if you only made interest-only payments previously.
How do HELOC Loans work Like Credit Cards?
Like credit cards, you'll only pay money on the interest you borrow. While you can access credit, you can spend as much or as little as possible. Also, you can tap continuously into your line of credit. Besides, this loan option offers lower interest rates.
With this line of credit, you can borrow in lesser amounts and only borrow what you need. Draw as much as you need, provided you don't exceed your loan limit.
75-15 HELOCs for condos in Florida
Enjoy seventy-five percent maximum financing on your first mortgage. Alternatively, you could opt for the 90 percent option that combines financing for your first and second mortgage. However, these loan options are only available for your primary residence.
With these loans, lenders lack the authorization to analyze the association budget. Besides, there will be no scrutiny on the number of funds directed to reserves. Once the condo insurance review is complete, the fidelity bond coverage won't require verification.
If you're looking to finance a condo purchase in St. Lucie County, Florida, then the 75-15 HELOC will serve you suitably. The application process is usually more straightforward as you only need to fill out a limited condo questionnaire.
Ideal for Divorces
Divorcing couples usually prefer mortgage options that give them the best deals during the divorce proceedings. HELOC loans are ideal second mortgages that can help with a divorce settlement payout. Besides, your primary mortgage remains intact.
Additionally, you won't have to refinance your first mortgage. Previously, divorcees opted for a loan refinance. However, this option usually means losing a great interest rate on your first mortgage.
You could also lock in a favorable rate after closing. You'll also avoid losing your current primary mortgage rate. Besides, with this line of credit, you avoid agent fees and commissions that arise from selling your home.
Suitable for Home Improvements
Although you can use this loan option for different purposes, opting to improve your home comes with additional benefits. This loan option comes with low to no closing costs. Besides, you'll enjoy more flexibility when borrowing and repaying the money. Most lenders will also offer you more flexible underwriting guidelines.
With this loan option, you can improve your home's value considerably. Consider projects that increase your home's square footage to get more value for the money you borrow. Besides, you could change the home's exterior and enhance its curb appeal.
Unlike a renovation loan that assesses a home's future value, HELOC loans usually depend on the home's current value.
HELOC Loans Advantages
If you qualify for this line of credit, here are some top advantages you can look out for.
Lower costs than other loan types
Personal and home equity loans usually require borrowers to pay a lump sum. For HELOC loans, you can borrow only what you need.
This approach helps lower your monthly payments if you need less money than you thought. Besides, you'll have an easier time avoiding unnecessary debt.
Borrow large amounts of cash
HELOCs are ideal whenever you can borrow large sums of cash for different purposes.
Fixed interest rates
Different mortgages have had increased interest rates throughout the year. For HELOCs, the rates tend to be lower than other mortgages. Such advantages make these loans more attractive for ongoing projects or debt consolidation.
Repayment Options Flexibility
Once you draw money from the line of credit, you'll get extended flexibility on how you clear the loan. For one, your HELOC loan timeline varies depending on how much you borrow. However, the loan generally has a term of 30 years.
Typically, you'll only make interest payments during the first years. However, your lender can allow you to make principal payments to lower your remaining balance before entering the repayment period.
Introductory Offers
Lenders might also offer enticing offers that attract new borrowers. Waived fees and lower initial interest rates rank high among these offers.
Ensure that you don't make a decision solely based on these offers.
No Restrictions on how you use the Funds
You can use the funds from these loans as you please. While your home secures the loan, you don't have to restrict the funds only to home improvements. Use the funds to consolidate your debts or precise higher education expenses.
Lower-interest HELOCs help you consolidate your high-interest debts into single loans. Ultimately, you'll save up hundreds of dollars in interest. Still, striving to clear the loan reduces the chances of losing your home.
This line of credit could also help you clear medical bills that can run into thousands of dollars for basic procedures. The lower interest rates let you pay off your bills in full while making repayments on your line of credit.
However, ensure that you don't use the cash impulsively as you might face financial ramifications.
Tax-deductions
You can also get tax deductions with the home equity line of credit. However, you'll need to use the money for home improvements.
Also, the deductions are only available up to a specific threshold depending on the combined interest on both mortgages.
HELOC Loan Application
Are you ready to apply for this line of credit? Here are essential steps you could follow.
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Lender Comparison - Shop around and compare different lenders before settling on an ideal option. Ask about repayment terms, interest rates, and charged fees. You might also want to know about the eligibility requirements of different lenders.
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Gather your documentation - Proceed to complete the application process after settling on your preferred lender. Ensure that you have all the required documents ready. Fill out the online application or visit your lender's local branch if they don't offer an online application.
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Home Appraisal - Your lender will request a home appraisal to determine the value and how much you can get from this line of credit. You can only proceed to home appraisal once they approve your income and credit. Set aside $300 to $400 to help cover the appraisal fees.
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Closing Preparation - After the appraisal, expect a call from your lender regarding approval for the HELOC loan. Your lender should also inform you about the associated interest rates and credit line limits. Proceed to sign the loan documents while considering any closing costs.
- Access the funds - Upon loan closing, you can access the loan funds if you don't change your mind. Start making withdrawals on your line of credit as you please.
The application process usually takes between three to four weeks, depending on the complexity of the process.
Top Places to Get Ice Cream within St. Lucie County, Florida
Do you need a spot to cool off the steam after a day in the scorching sun? Here are some restaurants you can visit for an ice cream treat.
Pistachio's Ice Cream and Gelato
Choose from a vast array of delicious ice cream flavors that will soothe your sweet tongue. The tasty homemade ice cream flavors hardly disappoint.
Try out the specialty sundaes and milkshakes that are a work of art. Enjoy reasonably priced ice creams served in reasonable portions whenever you visit this spot.
Twistee Treat
Stop by this restaurant to enjoy soft-serve ice cream, sundaes, and milkshakes. At Twistee Treat, you'll enjoy old-school ice cream vibes that take you down memory lane. Try the swirl gorilla-dipped cone that features a vanilla and chocolate cone.
Choose from this hidden gem's 25 soft serve flavors, ideal for a family day out. The yummy pina colada and the strawberry cone will also delight you.
Joy's Ice Cream Plus
Visit this ice cream spot for a diverse collection of homemade ice cream flavors. The cannoli ice cream, praline cream ice cream, and peanut butter fluff rank high among the regulars. The delicious and fresh ice cream portions will suit your taste buds and ease your cravings.
Most of the handmade ice creams have natural fruit ingredients. Make this your go-to place for your favorite ice cream treats.
Whit's Frozen Custard
Try out luscious, delicious, and smooth custard at the Whit's. Pick from diverse topping options. There is always something special whenever you stop by.
Sample the different flavors before settling on what you love. The pre-made ice cream looks and tastes great. You could also place an order for the ice cream cake.
Take Advantage of your Home's Equity with HELOC Loans
If you need low-cost financing in the mortgage industry, don't hesitate to opt for the home equity line of credit. Access your revolving line of credit and make continuous draws for various purposes.
(Mar 26, 2023)
