A HELOC offers you a revolving line of credit where your home acts as collateral, and unlike other loans, you borrow just the amount you need and pay back Interest on the amount you use. The best part about this equity loan is that it has lower rates and offers you a flexible repayment period of up to 20 years.
But before putting in an application, you must understand how a HELOC works to know what to expect and be prepared. This guide focuses on how HELOCs work, how to get one, and their advantages. You'll also discover the best spots for ice cream in Union County.
What is a HELOC?
A HELOC is a line of credit that works the like a credit card, where you use it to make purchases or cover expenses. And each time you make a purchase, the amount is deducted from your credit limit.
You start paying the outstanding amount at the end of the borrowing cycle. The difference between the two is that your home secures the HELOC loan.
How Much You Can Borrow with a HELOC
The combined loan-to-value ratio (CLTV) determines the amount you can borrow with a HELOC. The CLTV indicates the balance between a home's value less the secured loans. It includes all loans related to your home, like the current mortgage plus the HELOC you wish to obtain.
The CLTV determines a homebuyer's risk of default when using HELOC and another loan. It is usually possible to borrow up to 85% CLTV, which means that your mortgage and HELOC amounts cannot exceed 85% of your home's value.
The trick to lowering your CLTV and posing less risk to a lender is reducing your mortgage balance and having a higher down payment.
How a HELOC Works
Simply put, a HELOC offers you a revolving line of credit, and just like a credit card, you can repeatedly borrow funds and repay the debt over time. When you take out funds on your HELOC, the amount is added to your total balance, allowing you to continue borrowing as long as you're within your credit limit.
When your lender approves your HELOC application, they set a credit limit, the maximum funds you can borrow. The lender sets the limit depending on the value of your home equity and the combined loan-to-value ratio.
Withdrawing funds from your HELOC, the amount is subtracted from your available balance, and you can increase your available credit by repaying the balance.
A HELOC has two periods:
The draw period
The draw period is the duration you can borrow from your HELOC up to your credit limit. Though the time frame may vary depending on the lender, it usually runs between five to ten years.
The amount of equity you have in your home determines the funds available for borrowing, and you only have to take out what you need.
During this period, you only pay Interest on the amount you used, and your terms will determine if the lender will allow you to pay for the principal.
You may also pay your HELOC in total, which often comes with a penalty. Since HELOCs charge variable Interest, your payments will fluctuate during both periods.
The Repayment period
In this phase, you'll repay the funds borrowed during the draw period, which runs for over 20 years. Your payment will be higher since you're paying both the Interest and the principal.
Your HELOC will close when the draw period ends, and the repayment terms will begin when you can't borrow no more.
The Requirements for Obtaining a Home Equity Line of Credit in Union County, Florida
If you've been thinking of taking out a HELOC but are not quite sure how you can qualify for one, here is an overview of the standard requirements that your lender reviews on your application and also use to set your credit limits
20% Home equity
The most crucial HELOC requirement is that you must have sufficient equity to borrow against it. It's the amount you own in your home after subtracting your mortgage.
Lenders require you to retain at least 20% of the value of your home as a financial cushion. That's not all. Between your primary and second mortgage, you can borrow up to 80% of the value of your home.
A credit score of 680 or higher
A favorable credit score allows you to get a lower interest rate, saving you money over the loan term. Also, lenders consider your credit score when determining how likely you are to repay your loan on time, so a higher credit score improves your chances of getting approved for a HELOC with better terms.
While a credit score of 680 qualifies you for a HELOC, provided you have enough equity, most lenders prefer a higher credit score of 700. Some lenders may still approve your HELOC with a credit score of 620, but you must have more home equity and a low DTI of 36% or less.
A Debt-to-income Ratio of lower than 43%
Your DTI determines your debt level and ability to consistently pay your HELOC on time.
Generally, debt payments shouldn't exceed 36% of gross income, but some lenders will approve your HELOC with a DTI of 43% or more. But you have a better chance of qualifying for a HELOC if you decrease your debt-to-income ratio.
HELOCs are not always subject to specific income requirements, but most lenders will assess your income to ensure you can repay the loan.
They also consider your income level when determining your borrowing capacity, and a consistent income shows your ability to repay the loan. In addition, lowering your debt-to-income ratio may be easier if you earn more.
A positive Payment History
Lenders must ensure they don't risk too much when approving your HELOC application. They pay close attention to your consistency in paying your bills on time.
Late payment history may cause lenders to be less willing to lend to you, despite a decent credit score, since they see you as a higher risk.
The HELOC Application Process in Union County, Florida
Getting a HELOC is not complicated since it works like any other mortgage application process. You will be confident in completing the process when you know the steps and what to expect when applying for a HELOC. When you are ready to apply for a HELOC, follow these steps:
Compare lenders - Mortgage lending is a highly competitive market, and shopping around can help you find a lender that offers better interest rates and have flexible approval requirements. It's therefore advisable to get quotes from different HELOC lenders to compare their offers and save money in the long run.
Complete your HELOC application - After choosing your preferred HELOC lender, you can formally submit your application online or by phone or visit the nearest branch. The steps for filling out your HELOC application are similar to a mortgage. The lender will request your bank statement, pay stubs, W2s, and tax returns.
Approval - Following your HELOC loan application submission, the underwriter assesses your application documentation and requests for your home appraisal and inspection to determine the value of your home. If everything is in order, you can proceed to close the loan.
- Closing and access to funds - Once the lender approves your HELOC and it's official, the lender gives you three business days to review the loan documents and decide if you want to cancel or go forward with the loan. You will then sign the necessary documentation and disclosures. The lender will then deposit the funds in your HELOC account.
HELOC for Condos in Florida
Buying a condo in Florida is a lucrative investment, but the rising home prices may make owning one out of reach. Luckily, HELOC can help as an easy way to become a condo owner by taking it out as a second mortgage and using your home as collateral.
Your first mortgage will usually cover 70% of the buying price, the HELOC covers 15%, and the remaining 10% is the down payment. The advantage of using HELOC to finance your condo is that you avoid paying private mortgage insurance, which is convenient since you will close both loans simultaneously. It doesn't end there, here are more benefits of using HELOC:
HELOC gives you 90% financing—you only need to pay for the down payment and no PMI.
The condo is subject to a limited review, so you will not fill in the complete project questionnaire.
The HOA takes care of the fidelity bond; you don't need to review it when applying for your condo insurance.
You do not have to worry about the lender scrutinizing the HOA's finances, including the reserve amounts.
- Owners or investors do not need to disclose the number of units occupied when approving a HELOC.
What's great about it HELOCs is that you can make interest-only payments during the draw period, which runs up to 15 years. This option offers greater flexibility in how you spend your money, and you can divert the funds to paying off the mortgage, for emergencies, or other investments.
The Advantages of Home Equity Line of Credit
HELOCs allow you to tap into your home's equity and use the funds for significant expenses and projects. You enjoy a revolving line of credit when you need it and have a long repayment period. Here are more advantages of taking out a HELOC:
Lower interest rates - HELOCs usually have lower rates and minimal closing costs than unsecured and personal loans, making them an attractive option for funding ongoing projects. Your lender also offers you an introductory rate in the first year, which in most cases, is lower than the interest rate of your primary mortgage.
Only pay for what you spend - A HELOC operates similarly to a credit card, where you use what you need and pay back what you spend and the Interest. With a HELOC, you can also borrow small amounts when required, preventing you from accruing unnecessary debt, unlike other home loans, which give you a lump sum at once.
Interest may be deductible from taxes - Unlike other home loans, the HELOC has tax benefits when you use the proceeds to build, buy, or for home improvements. When filing your taxes, you can claim the Interest as a deduction, depending on the Interest you paid on the primary and second mortgages.
No restrictions on how to use the funds - You are not limited in what you can do with HELOC funds and use them depending on your needs, for home renovation, paying medical bills, or buying investment properties.
Great for Divorces - Co-owning a property with your partner makes divorce more challenging, especially when divorcing. But the good news is that taking a HELOC as a second mortgage can help you buy out your spouse and remain with the home. You don't lose a reasonable interest rate on your first mortgage when taking out a HELOC; instead, you can lock in the rate to protect you from fluctuations.
- Great for Home Improvements - There's no doubt that home improvements can be expensive, and it's wise when financing them through a HELOC to invest in projects that add value to your home so that you can recoup your investment. The best part is that HELOC uses the present value of your home, which includes both interest rate and discounted rate, has low closing costs, and is deductible.
HELOC vs. Refinancing - What is the Right Choice for You?
HELOCs and refinancing are the most popular ways to convert equity into cash by borrowing against your home equity.
HELOC provides the flexibility of quick access to cash, and you only pay for what you use. HELOC is the right choice for you when you're undertaking long-term projects and are unsure how much you need.
The HELOC also comes with numerous benefits, such as borrowing up to 85% of your home's value, unlike refinancing, which only offers you 80%.
You also enjoy lower closing costs, while the closing costs for refinancing can account for 2%-5% of the loan amount. On top of that, HELOC has a deductible interest.
5 Best Ice Cream Places in Union County, Florida
What is summer day complete without an ice cream treat? This small county continues to dish up ice cream flavors ranging from strawberry to Brazilian chocolate.
After a day of fun, here are a few spots to check out for a sweet dessert while in Union County.
Naughty Italian Ice - You can't get enough flavor and sweetness of the Naughty Italian Ice. Here you have creamy, rich, and full-flavored ice cream in plenty of flavors, and their portions are generous. The watermelon flavor is creamy but light and is a perfect cold treat on a hot day. You should try the loved dark chocolate and coconut.
D'lites Emporium - The D'lites Emporium serves soft-serve ice cream, which is the place if you're looking for a healthier alternative. The ice cream is not too sweet at times, and most flavors change daily, apart from chocolate and vanilla, to keep things interesting. It's also a remote location and an excellent place to relax as you enjoy a sweet treat.
Feliz Ice Cream - If you want premium ice cream, Feliz is your place. They texture complex and delicious flavors with a thick and silky texture. Their ice cream sandwich is a fan favorite. The Chocolate on-chocolate and Brazilian chocolate flavors are unique and give you something different. The staff will take you through the different exotic flavors and even let you try them.
B'z Gelati - B'z Gelati is a fantastic place and serves some of the best gelati in the area. The ice cream tastes so good, and it is made from scratch and sweetened with honey. They also serve non-dairy options. This B'z will quickly become your go-to dessert spot once you taste the vanilla and strawberry flavors. You will be back for more.
- Cold Stone Creamery - The cold stone offers customizable creations mixed by hand on a granite slab. You will have one of the most memorable ice cream experiences when watching them make it in front of you. They have excellent service with suitable varieties of mix-ins and flavors. Waffle bowls covered in chocolate are a guaranteed hit.
HELOC Loan - The Bottom Line
A HELOC allows you to utilize the equity you've built over time to pay your mortgage, consolidate debts or increase your home's value through upgrades and remodels.
You will enjoy low Interest, tax deductions, and flexible repayment. Contact your lender today to know if you qualify for one and how to apply.