Has your home’s value increased? Has your mortgage principal been significantly reduced by years of payments? In either case, you have built up a good amount of home equity. You can use this equity towards getting a home equity loan or home equity line-of-credit (HELOC).
How Does A HELOC Work?
A HELOC, or home equity line-of-credit, provides you with a revolving line-of-credit, similar to a credit card. The key difference is, that your home equity serves as collateral for this loan. The money is withdrawn as you need it, within the amount of credit approved. When you make payments, the available credit gets renewed. Many people used HELOC loans to make home improvements or to consolidate debt that has higher interest rates.
Here are several aspects of HELOC loans that can make a big impact on payments:
Prime Interest Rate – Majority of banks use this rate as a foundation for the rate they offer.
Annual Charge – A one-time charge, required every year within the term of the loan.
Cancellation Charge – Typically $500 to $1,000, applied when credit gets closed within 3 to 5 years of the origination date.
Minimum Withdrawal – Minimum amount that must be withdrawn whenever funds are borrowed.
Margin – Final interest rate is determined by adding a margin (amount) to the prime rate.
Teaser Interest Rate – Introduction rate, temporarily applied, previous to the margin being added to prime rate.
Discount For Automated Payments – Discount on rate, if you arrange automated payments through a bank account with the same lender.
Fees Up Front – Lender fees for arranging a HELOC and for home appraisals.
HELOC Basics
Requirements for HELOC loans include having a loan-to-value ratio of minimally 80%. This means that you have 20% or more of home equity. Your credit rating, employment history and your DTI, or percentage of debt compared to income will be evaluated. The credit limit is based on your property’s appraisal because it’s used as collateral for the loan. The withdrawal period often is 10 years maximum and is done through an access card or specific checkbook.
