Understanding Home Equity Line of Credit Loans

What is a Home Equity Line Of Credit (HELOC)?

A Home Equity Line of Credit, commonly referred to as a HELOC, can serve as a secondary mortgage, allowing you to tap into the cash value of your home. For those who fully own their home, it can also act as a primary mortgage. Essentially, you’re borrowing against your home’s equity, which is calculated as the current value of your home minus any outstanding mortgage amounts. 

Most lenders will allow you to borrow up to 85% of your home’s equity, though this percentage can vary. Similar to how you use a credit card, you can draw funds from your HELOC and make monthly repayments, either paying off the full amount or a portion of it. 

However, unlike credit cards, HELOCs are not designed for small, everyday expenses. Tapping into your home’s equity often provides the most favorable rates when comparing loan options.

How Does a HELOC work?

A HELOC gives you the financial flexibility to borrow against your home equity, repay and repeat. Because HELOCs are secured by an asset (your home) interest rates are typically competitive. This also makes them risky because you can lose your home if you cannot make your payments.

There are two phases of a HELOC:

• The Draw Period: During the draw period, borrowers have the ability to withdraw funds up to an established limit. While only interest payments are required during this phase, paying toward the principal is optional. This phase generally extends over a 10-year span
• The Repayment Period: This begins when the draw period concludes. During this period, additional withdrawals are not allowed. Borrowers must pay back the borrowed amount along with the interest accrued. Payments are generally much higher at this stage as you are also paying the principal loan back. This phase typically lasts for 20 years.

What is a Variable Interest Rate

When you have a variable interest rate on your home equity line of credit, the rate can change from month to month. This means the amount you pay during your draw period will also change. The variable rate is calculated from both an index and a margin.

An index is a financial indicator used by banks to set rates on many consumer loan products. Most banks use the U.S. Prime Rate, as published in The Wall Street Journal, as the index for HELOCs.

The other component of a variable interest rate is a margin, which is added to the index. The margin is constant throughout the life of the line of credit.

When you draw funds from your HELOC, you will be issued monthly statements that outline minimum payments covering both the principal and interest. These payments can vary, depending on both your current balance and any shifts in the interest rate, and can also be affected if you choose to pay more towards the principal. Opting to make extra payments towards the principal, whenever possible, is a wise move as it will decrease the amount of interest you incur and expedite the reduction of your total debt.

How to Get a HELOC 

The process of getting a HELOC is similar to that of applying for a purchase or refinance mortgage. You'll provide some of the same documentation and demonstrate that you're a creditworthy investor. Here are the steps you'll follow:

1. Calculate your existing equity (the current value of your home, minus what you owe) and decide how much you need to borrow. Learn more about how much equity you need to qualify for a HELOC.
2. Gather the necessary documentation 
3. Shop around multiple lenders and apply for the HELOC.
4. Read your disclosure documents and ask the lender questions. Make sure the HELOC will fit your needs. 
5. Be aware that the underwriting process, though not as extensive as when you got your mortgage, can take weeks. At Modern Lending, we can handle this process in no more than 21 days.
6. Once the loan closes and the paperwork is finished you can collect your loan.

Requirements to get a HELOC

Requirements vary from lender to lender, but these are generally what you will need:

• A debt-to-income ratio that’s 40% or less.
• A credit score of 620 or higher.
• A home value that's at least 15% more than you owe.

The entire process of homebuying can be a stressful endeavor and may seem hopeless if you don't have enough for a down payment on a house to begin with. HELOCs offer a solution so that you can become a homeowner. If you are looking to finally become a homeowner, let us help you! Get in touch with us at ModernLoans.com or call (844)-44-MODERN.