A HELOC is a revolving line of credit that is secured by a lien on your home. You can get this type of credit only if you own your home and if you have enough equity to support the amount of the credit limit. If you draw on the line of credit, you will be required to pay back that draw, plus interest, during the term of your loan.
Some HELOCs permit you to make interest-only payments during the period of time you are allowed to draw on the line of credit (i.e., the Draw Period). If you choose an interest-only payment during the Draw Period, there’s a good chance you could have a balloon payment due at the end of your HELOC term. In order to prevent this, many consumers look for a HELOC that allows you to repay the outstanding balance over a certain period of time (i.e., a Repayment Period).
Plus, there’s a possibility that, like with your mortgage, you can claim interest you paid on the HELOC as tax-deductible (be sure to speak with a qualified tax advisor to find out whether that might be true for your case).
You can use your HELOC funds to consolidate higher-interest debt, pay off student loans, make repairs or improvements to your home, or handle other expenses that might crop up. Often, HELOCs come with lower interest rates than many other types of loans, so you can wind up spending less over time.
How does a HELOC work?
The key to the amount of credit you can be assigned in your HELOC is how much equity is in your home. Equity is usually the value of your home above what you owe on your mortgage(s). So, for example, if your home is valued at $200,000 and you owe $100,000 on your mortgage, you have $100,000 in equity in your home. As your home value increases and as you pay off more of your mortgage, you have more equity available.
Most lenders will allow you to borrow up to 85% of the combined loan to value of your home. However, Bellco will allow some creditworthy borrowers to go up to 97% of the combined loan to value of their primary residence. The combined loan to value ratio can be calculated by dividing the sum of all secured loans on the home by the value of the home. Therefore, using the example above, with $100,000 in equity in a home valued at $200,000, you could borrow up to $70,000 on a Bellco HELOC to reach 85 percent combined loan to value when the Bellco HELOC is combined with the original $100,000 mortgage.
Most HELOCs follow a 20-year plan. What this means is that you have ten years to draw from the credit line (called the Draw Period) and then 10 years after that to pay off what you owe (called the Repayment Period), usually paying principal and interest (much like your mortgage). During the Draw Period, you can draw from the credit line and pay it down as many times as you like; you can even take various increments out as you need them, borrowing as little or as much as you need from what’s available, provided you borrow at least the minimum draw amount required by the HELOC. During the Draw Period, you will also be required to make either interest-only payments, or pay some amount to pay the interest accrued, as well as pay down part of the draws you’ve made.
How to qualify for a HELOC
To qualify for a HELOC, you need to have equity in your home, and meet the credit criteria for the HELOC. The lender will determine your creditworthiness by examining your credit score, your monthly income, your debts, and your employment (the same things your lender looked into when you applied for your mortgage).
If you intend to apply for a HELOC, first find out whether the lender charges fees, like an application fee, annual fees, or closing costs. You should also find out whether there are cancellation or early-closure costs (a.k.a. pre-payment penalties).
Variable interest rates vs fixed interest rate options
Having a variable rate on a loan means that the interest rate changes based on the market. With a variable rate, your monthly payment amount will fluctuate, not only based on how much you owe or draw each month but also based on the changing interest rate. If the market rate goes up, so will your interest rate, which could mean an increased payment each month.
A fixed-rate is just that: the interest rate is the same during the term of the loan or the draw. Your payment amount might change if you withdraw more from your credit line, but the interest will remain steady. With a Bellco ChoiceLine HELOC, you have the option to lock in your rate on three separate draws at any time during the 10-year Draw Period, which will convert the variable rate to a fixed rate based on the market at that time. The fixed-rate draw will have its own term, and be fully amortizing over that term. The repayment term of a fixed-rate draw can never exceed the remaining term of your HELOC.
Home equity loan vs line of credit
Another option for borrowing money is a straightforward home equity loan. With this loan, you borrow a fixed amount of money backed by the equity in your home (usually up to 85 percent combined loan to value of the home) and then pay it back with fixed monthly payments of principal and interest until it’s paid off. Unlike a line of credit, you can’t dip back into the loan after you’ve paid part of it down; you would have to refinance the loan before you can access new funds.
Ready to apply for a HELOC?
Bellco members can get a Bellco ChoiceLine home equity line of credit with no annual fees or early-closure penalties.* Contact one of our loan specialists at 1-800-BELLCO-1 or fill out the easy online application form. After you have closed on your HELOC, you’ll have access to the funds you need to handle life’s expenses.