What the HE-LOC?

home renovation project

posted October 9, 2020 in Blogs

With what seems to be never ending economic devastations this year, many are in need of large sums of money in order to get by and transition into what is hopefully a fresh start in 2021. While most will immediately think of applying for a traditional loan, there are other options that are able to give you the cash flow you need, and still allow you to keep your freedom.

If you’re looking to complete home improvement projects this fall, or the economic devastation of COVID has left you in need of cash, consider tapping into your home’s equity! One great way to do this is by opening a home equity line of credit, or a HELOC. We’ll walk you through, ‘What the hel-oc, is a HELOC?” and why they can be a smart option for homeowners in our current financial climate.

What is a HELOC?

A HELOC is a revolving credit line that allows homeowners to borrow money against the equity of their home. The HELOC is realistically like a second mortgage on a home. If the borrower owns the entire home, the HELOC would become the primary mortgage.

Given that a HELOC is a line of credit and not a fixed loan, borrowers can withdraw money from the HELOC on an as needed basis, rather than borrowing one large lump sum. With this type of program, is allows for more freedom than a traditional loan. It’s especially beneficial for those who don’t quite know how much money they’ll need to complete their projects, or when you decide to make a project bigger than originally planned. We all know that happens all too often!

How does it work?

Borrowers can withdraw funds (aka “draws” or “advances”) from the HELOC during a set amount of time that is known as the “draw period,” which typically lasts 10 years. Some lenders place restrictions on HELOCs and require borrowers to withdraw a minimum amount of funds each time they make a draw, regardless of need. Other restrictions may include requirements to keep a fixed amount of money outstanding, or to withdraw a specific amount when the HELOC is first established. At Greater Iowa, we offer borrowers very flexible terms to fit your specific needs with very little restrictions.

How can borrowers spend the money? 

While home improvement projects are popular uses for HELOCs, borrowers are free to spend the money however they need to! Some other smart uses for HELOCs could include debt consolidation, funding a wedding, adoption, dream vacation or maybe even the launch of a new business. With the ups and downs 2020 has brought us, HELOCs can be a great option for a very wide variety of needs.

How do I repay my HELOC?

Repayment of HELOCs vary, but it is usually very flexible. Many lenders collect interest-only payments during the draw period, with principal payments being optional. Others require ongoing monthly payments toward both principal and interest.

When the draw period ends, some will allow borrowers to renew the credit line and continue withdrawing money. Other lenders require borrowers to pay back the entire balance due, also known as a “balloon payment.” However, others allow borrowers to pay back the loan in monthly installments over another set amount of time, known as the “repayment period.” Repayment periods are very generous, lasting as long as 20 years.

Is everyone eligible for a HELOC?

Like every loan and line of credit, HELOCs have eligibility requirements, which help lenders determine the applicant’s financial wellness and responsibility. Most often, the borrower must have a minimal amount of equity built up in the home.

Lender requirements vary, but most homeowners will be eligible for a HELOC with a debt-to-income ratio that is 40% or less, a credit score of 620 or higher and a home assessment that stands at a minimum of 15% more than what is owed. We don’t want to get too far in the weeds with all of these numbers, but know we’re here to guide you through the process from start to finish! If you’re curious, give GICU a call!

How much can I borrow with a HELOC?

HELOC amounts vary along with three key criteria: the value of your home, the percentage of that value the lender allows you to borrow against and the outstanding amount on the existing mortgage.

To illustrate, if you have a $300,000 home with a mortgage balance of $175,000 and your lender allows you to borrow against 85% of your home’s value, multiply your home’s value by 85%, or 0.85. This will give you $255,000. Subtract the amount you still owe on your mortgage ($175,000), and you’ll have the maximum amount you can borrow using a HELOC, which is $80,000. Again, we’re here to help. If you’d like us to run your numbers for you, we are more than willing to do so in order to help you determine if it’s a smart or possible move to make!

Is a HELOC a good option right now?

HELOCs have variable interest rates, which means the interest on the loan can fluctuate over the life of the loan, sometimes quite dramatically. This variable is based on a publicly available index, such as the U.S. Treasury Bill rate, and will rise or fall along with this index, though lenders will also add a margin of a few percentage points of their own.

The fallout of COVID-19 may impact the economy for months, or years, to come; however, there is a silver lining among the rising unemployment rates and bankrupt businesses: historically low interest rates. The average APR for fixed 30-year mortgages has been at the low 3% for months now, and experts predict it will continue. The low rates make it an excellent time to take out a HELOC with manageable payback terms.

Are you looking to tap into your home’s equity with a HELOC? Call, visit us online, or stop by Greater Iowa Credit Union today to get started. Our great rates, generous eligibility requirements, easy terms, and our current No Closing Costs offer, make a Greater Iowa Credit Union HELOC a perfect choice!

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