A HELOC is a line of credit secured by your home and functions similarly to a credit card. Its versatility and low-interest rates compared to other loan products make it an attractive option for homeowners needing funding. It gives you access to a revolving line of credit that you can use for larger expenses such as home improvements, renovations, and debt consolidation.
In this complete guide, we'll have an in-depth look at HELOC loans, including how they work, their advantages and why they are a better option than cash-out refinancing. So, without further ado, let's dive right in.
What Is A HELOC Loan?
A HELOC loan is a type of loan secured by your home. A HELOC loan differs from a traditional mortgage since you don't receive them as a lump sum payment but as a revolving line of credit. A HELOC loan is still considered a mortgage since your home secures it.
HELOC loans are similar to credit cards because they allow you to continuously tap into the line of credit during the draw period, up to your credit limit. Upon closing, you're granted full access to the credit line and can spend as much or as little as you want, paying only interest on the amount spent.
This distinguishes it from an installment loan, such as home equity or personal loan, whereby you receive the loan in one lump sum payment.
How Do HELOC Loans Work?
HELOC loans typically operate through a 30-year model. As soon as you open your HELOC loan, you'll have a 10-year draw period during which you can withdraw money against your HELOC limit or use your HELOC card or checkbook to pay for expenses.
You can also pay down your principal during this time. During the draw period, you're only required to pay interest on the amount you withdraw, and no interest is charged on the unused portion of your credit line.
Once your draw period elapses, you enter a 20-year repayment period during which you can no longer make withdrawals. Instead, you'll make monthly interest and principal payments on your HELOC balance.
How To Qualify For A HELOC Loan
To qualify for a HELOC loan, there are several eligibility requirements that you must meet. These are:
With regards to mortgages, equity refers to the stake that a borrower has in a home. In other words, it is the difference between what you owe on a mortgage and the home's current value.
Equity is typically expressed as a percentage and is calculated by dividing your current mortgage balance by the market value of your home. For instance, if your current mortgage balance is $200,000 and the market value of your home is $800,000, you have 25% equity.
To qualify for a HELOC loan, most lenders will require you to have at least 15% to 20% equity in your home.
It's also worth noting that the limit you're offered depends on your loan-to-value ratio (LTV), which you can compute by dividing your mortgage balance by the market value of your home. Ideally, you should aim for an LTV of 80% or less.
Lenders will also consider all of your debt on the property about its value, known as the combined loan-to-value (CLTV) ratio. Most lenders require a CLTV of no more than 85% to qualify for a HELOC, though some will accept CLTVs as high as 90%.
To determine your CLTV, add all secured loans on your property, including your first mortgage and any home equity loans, then divide the total by the value of your home.
As with other types of mortgages, HELOC lenders will look at your credit score when qualifying you for credit. This is done to determine whether you're a risky borrower likely to default on repayment.
While credit requirements may vary depending on your lender, it is generally recommended to have a credit score of at least 680 when applying for a HELOC loan. However, a credit score of 700+ is preferable.
Besides increasing your chances of qualifying for a HELOC loan, having a higher credit score may also qualify you for lower interest rates.
When applying for a HELOC loan, your lenders will be keen to find out whether you have enough income to afford repayment. Consequently, you'll be required to provide documentation about your income information and employment.
Some of the documents that may be required to submit include:
Most recent W-2 forms and pay stubs (if you're employed).
Most recent federal tax returns (if you're self-employed).
Benefit verification later from your Social Security account.
- Benefit statements or 1099 forms.
Your debt-to-income ratio (or DTI) refers to the amount you owe on monthly debt payments compared to your monthly income. Your DTI ratio is a critical factor influencing whether you qualify for a HELOC loan. Lenders typically examine your DTI ratio to determine whether you can reasonably manage more debt.
To be approved for a HELOC loan, you need to have a DTI ratio no greater than 50%, although some lenders may require a DTI significantly less.
How Does The 75/15/10 HELOC for Condos Work?
If you intend to take out a HELOC loan for home financing, one of the best ways to do so is by taking it out as a piggyback mortgage. A piggyback mortgage is essentially a second mortgage that you take out simultaneously as your first mortgage to finance the rest of the home purchase.
Taking out a piggyback mortgage is a great home financing option if you want to purchase a home without a large down payment. Also, taking them at the same time as your primary mortgage exempts you from paying private mortgage insurance (PMI), thereby saving you lots of money over the term of your loan.
While there are different piggyback mortgage arrangements, one of the most popular is the 75/15/10 split. In this arrangement, your primary mortgage represents 75% of the home's value, while a HELOC loan represents another 15%. This totals up to 90% combined financing on your first and second mortgage, with the remaining 10% representing the down payment.
This HELOC option is commonly used when purchasing condos in Florida since the mortgage rates for these properties tend to be higher when the LTV ratio is higher than 75%.
How Can a HELOC Loan Help With Divorce?
It's no secret that divorces can be very complicated, even under the best circumstances. One of the main challenges occasioned by divorce is deciding how to pay out home equity to your spouse.
While you may decide to sell the home, you'll lose up to 10% of the home's value to agent commissions and other fees. Also, once you finalize the divorce, you and your spouse will have to purchase again, further incurring high mortgage rates and closing costs. Another alternative would be to do a cash-out refinancing, which might double your interest rate.
So, how do you go about making a divorce payout without having to deal with these liabilities? You might consider taking out a HELOC loan for your divorce payout. As already highlighted, HELOC loans are second mortgages that give you a line of credit without affecting your primary loan. So, your main mortgage remains intact even if you take out a HELOC or a divorce payout.
Another advantage of taking out a HELOC for a divorce settlement is that you can get up to 100% of your home's equity, which you'll likely enjoy with cash-out refinancing. Also, most lenders will allow you to lock in a portion of the HELOC or all of it upon closing.
Using A HELOC For Home Renovations
HELOC loans are a great financing option when remodeling your home. As mentioned earlier, HELOCs are similar to credit cards in that they allow you to borrow money up to a specific limit based on your home's equity.
You can withdraw money from your HELOC to fund your remodeling project, and you'll only need to pay interest on the amount you withdraw, thus giving you a lot of flexibility in terms of borrowing and repayment.
Also, unlike credit cards, which often charge high-interest rates, HELOC loans offer low-interest rates, thus allowing you to keep your costs down while increasing the market value of your home.
Another benefit of using a HELOC for home renovations is that the interest you pay may be tax deductible. Provided you're using the loan to increase the value of your home; you can strike out the loan's interest on your annual tax returns.
Advantages Of HELOC Loans
HELOC loans offer numerous benefits compared to other popular types of loans. These include:
There Are No Restrictions On The Use Of Funds
One of the most significant advantages of HELOC loans is that you can use them whichever way you like. Although your home secures the loan, you don't necessarily have to use the loan to finance your home purchase or renovate your home. You can also use the funds to consolidate your debts, travel, or even finance your higher education.
That being said, the fact that your home secures your HELOC loan also forces you to be responsible for how you use it since you risk foreclosure if you default.
They Offer Low-Interest Rates
Since your home secures HELOC loans, lenders are willing to offer you meager interest rates compared to credit card loans and personal loans. Interest rates charged on HELOC loans can be as low as 3%.
They Allow You To Borrow Large Amounts Of Cash
With a HELOC loan, you can borrow a lot more than you would with a credit card or personal loan. These loans are ideal financing options for significant expenses such as home renovations and debt consolidation.
They Offer Flexible Borrowing and Repayment Options
HELOCs allow you to borrow funds when you need them and in the amounts you need, making them a great way to cover ongoing expenses. Likewise, you only pay interest on the amount you withdraw, thus reducing your interest payments.
Most HELOC lenders today offer fixed-rate options which allow you to lock in a portion of your HELOC balance at a fixed interest rate over a given period. This buffers you against high-interest rates that might be occasioned by external (market) factors.
Is HELOC Better Than Cash-Out Refinancing?
Unlike a HELOC loan which gives you access to a revolving line of credit, cash refinancing essentially entails taking out a larger mortgage to replace a previously existing one, thus getting you some extra cash.
As with HELOC, cash refinancing allows you to realize some of your property's value in cash. However, this option has several downsides compared to HELOCs. For instance, cash-out refinancing typically carries high-interest rates and closing costs.
Likewise, the process involves complex underwriting and more stringent eligibility requirements. You'll typically need a high credit score and LTV ratio to get a favorable deal from your lender.
Top 5 Places To Get Ice Cream In Volusia County, Florida
Considering how hot the weather in Florida can get for much of the year, it's no surprise that ice cream is a popular treat in this part of the US.
Here are some places worth checking out if you're wondering where to get some of the best ice creams in Volusia County, Florida.
Twisters Ice Cream Cafe
Twisters Ice Cream Cafe is a family-owned, run ice cream cafe and shop serving freshly made artisanal ice cream and Italian ices. The establishment offers delightfully soft-serve ice cream in a colorful array of flavors, including chocolate, vanilla, strawberry, and twist.
In addition, Twisters has gluten-free options for health-conscious patrons looking to indulge their sweet tooth. Besides its assortment of tasty ice cream, the cafe also offers ice cream cakes and freshly-brewed European-style espresso, latte, and cappuccino.
Ice Cream Fundaes
Located at 226 S Volusia County, Orange City, Florida, Ice Cream Fundaes offers an extensive ice cream menu with more than 40 flavors. Apart from its delicious ice cream and Italian ice, the cafe also offers splits, sundaes, slushies, cheesecakes, cookies, and more.
The establishment has comfortable indoor and outdoor sitting areas that allow patrons to enjoy a relaxing atmosphere as they indulge themselves in the best ice creams that Volusia has to offer.
Danny's Ice Cream
Danny's Ice Cream in DeLeon Springs is an ice cream parlor with a little something for everyone. Besides offering some of the best in-house ice creams in DeLeon Springs, the cafe also features an extensive Mexican menu with plenty of culinary delights for patrons to sample.
Deltona Ice Cream
At 2801 Elkcam Blvd in Deltona, Florida, Deltona Ice Cream serves a wide assortment of ice cream made from the best ingredients. The ice cream for each day is made the previous night, thus ensuring it's fresh when served to patrons.
Rodeo Whip is a South DeLand ice cream shop serving homemade ice cream, soft serve, sundaes, and shakes since 1983.
The family-owned and operated shop is a favorite with many locals and almost always has a line. But the wait is always worth it as the ice creams are tongue-tinglingly sumptuous.
A HELOC loan is an excellent credit option, whether you want to renovate your home, purchase some new furniture or pay off some debts.
Not only does it offer immense financial flexibility by allowing you to borrow what you need and pay interest only on what you spend, but it charges incredibly lower interest rates compared to other popular credit options like credit cards and personal loans.