What is a HELOC?

What is a HELOC? Well, that is a question many have been asking lately. Especially with Las Vegas home values having risen over 50% in the last few years. Now Las Vegas homeowners are looking for ways to tap their equity without selling their home or refinancing their primary mortgage. And so, this may interest you if your home has gained significant value since you purchased it.  Or even if you’ve just paid so much of the mortgage down that you’ve got ample equity to work with. Either way, a HELOC on your home might make sense.

Home Equity Lines of Credit (HELOCs) are popular options for homeowners in this very situation. HELOCs are flexible loans that give you a lot of options. They also give you time to decide what you want to do with your equity. However, a HELOC can also be a bit confusing because they don’t work like a more traditional home loan.

A HELOC is a Line Of Credit

Keep in mind that when it comes to a HELOC, unlike a traditional home equity loan, a HELOC is a line of credit. That means that they work much more like a credit card than a mortgage. You’re approved for a line of credit that represents the maximum amount of money you can charge to your HELOC. Then, your payments are based on how much of that line of credit you’ve used.

If you max out your HELOC, you can pay it down and charge again, just like with a credit card. Unlike a credit card, however, your home is being used as the security for this loan. And so if you get in over your head, your home is at risk of foreclosure. So you must be very careful with this particular kind of credit line.

Related: Choosing The Right Loan

They Have Two Separate Loan Periods

HELOCs start out their lives as open lines of credit. This allows you to charge or pay off as much as you wish at any given time. You’re usually expected to make at least an interest payment each month, but beyond that, you can charge a lot or a little and only pay based on the percentage of the credit line you’ve utilized. This is known as the “draw” period. As I write this in September of 2022, I see unique programs available. Charity Bond of Epiq Lending has a HELOC where payments don’t start for 6 months. This is a great way to make repairs to a house before your sell it.

This period of the HELOC, where it functions as a line of credit, is usually about 10 years. However, it can be more or less, depending on the loan you take out. Immediately following this period, your HELOC becomes a set loan. At this point, you can no longer charge anything else to the line of credit.

The Repayment Period

In the repayment period, your HELOC becomes much more like a traditional second mortgage. And so it has a payment that’s based on the amount of credit you ultimately used during the draw period. From here on, your payment is more or less fixed, but can vary if you have an adjustable rate loan. The repayment period is usually about 20 years. However, that can be different based on your agreement with your bank.

There is often a balloon payment due at the end of the repayment period. And so if this is a concern for you, you have options. Either have a loan that will fully amortize or pay extra each month to ensure your last payment takes your note to a zero balance. A simple amortization calculator can help you figure that out.

Related: 5 Things That Can Ruin Your Chances Of Getting A Mortgage

What Can I Use It For?

Certainly, there are many ways that you can use your HELOC. Many owners use them to consolidate debt. After all, to pay off credit cards over 20% APR with a HELOC of say 10% APR makes great sense. Many homeowners use their HELOC to remodel or upgrade their home.

Other homeowners use their HELOC as a way to increase their investments. I have seen homeowners get a HELOC and then use the funds to buy an investment property. Again, if you pay 10% interest on the loan, but make a 30% profit, you come out far ahead. Especially when looking at a long term strategy with an end goal of a CRT or similar tool.

Related: Find Your Real Estate Strategy

HELOC Requirements

Like other home equity loans, you’ll need to be able to qualify for a HELOC with a reasonable credit score. Also, a debt-to-income ratio of about 40% or below, and a high amount of home equity. Most lenders won’t lend more than about 85% of your home’s equity back to you, in case of default.

Of course, there are exceptions to all of these rules of thumb, so it’s very important to consult with multiple lenders before you make your final decision on who will be servicing your HELOC. You’ll also need an appraisal to assess the current value of your home. And of course, there will be closing paperwork to finalize and record the loan.

 

I have a list of lenders that I trust to give you the best service. Call me today for a brief conversation so that I can send a few lenders to you that will work best for you.  (702) 743-7625.

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