April 10, 20248-minute read
Author: Victoria Araj
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A house can be an important asset to have in your financial portfolio. However, because a house isn’t a bank account, its value can be hard to access when you need it the most. Fortunately, you can capitalize on several options to convert your home’s value into cold, hard cash. One option is a home equity line of credit (HELOC), which allows you to borrow against the equity in your home. Although Rocket MortgageⓇ doesn't offer HELOCs, we can explain how they work and compare them to other home equity options to help you decide whether a HELOC is right for you. Let’s go over everything you need to know.
Table Of Contents
What Is A Home Equity Line Of Credit?
A home equity line of credit is a type of second mortgage that lets homeowners borrow against their home equity as a line of credit. Borrowers can use HELOC funds for a variety of purposes, including home improvement projects, education and high-interest credit card debt consolidation.
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Qualification Requirements For HELOCs
Qualifying for a home equity line of credit is a lot like qualifying for a mortgage refinance. You must meet certain requirements to qualify for a HELOC. HELOC requirements will vary from lender to lender, but you typically need: Overall, HELOC requirements are similar to the requirements to refinance a mortgage. Review the requirements to get the best understanding of the options available to you.
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How Does HELOC Repayment Work?
A HELOC has two separate phases. They are known as the draw period and the repayment period. You’ll make payments on the HELOC during both periods. The first phase is the draw period. It’s when your line of credit is open and available for use. During this period, you can borrow from your line of credit as needed and make minimum or interest-only payments on the amount you borrow. If you reach your credit limit, you’ll need to repay some of your balance before you can borrow more money. You may be able to refinance your HELOC to extend your draw period. Once you reach the end of the draw period, you’re in the repayment period. You won’t be able to borrow from your HELOC and must begin making full monthly payments that cover the HELOC’s principal and interest. If you’ve been making interest-only payments to this point, be prepared for your monthly payments to go up – potentially by a lot. The length of both periods will depend on the loan you get. For example, you may decide a 30-year HELOC with a 10-year draw period and a 20-year repayment period makes the most sense for you.Phase 1: The Draw Period
Phase 2: The Repayment Period
What Are The Pros And Cons Of A HELOC?
HELOCs can be beneficial financial tools. But they’re not ideal for every financial situation. Here are the most important disadvantages and advantages to be aware of before applying for a HELOC:Pros Of A HELOC
Cons Of A HELOC
HELOC Loan Calculator
Use the following formula to determine your maximum available equity and your HELOC credit. To calculate your estimated line of credit for a HELOC, you will want to use the following calculation: Going off our earlier example, let’s say you find a lender who’s willing to give you a HELOC with 80% LTV. Your home is worth $250,000 and you currently owe $180,000. To figure out how much your credit limit would be on this HELOC, multiply your home’s value by 80% and subtract your current balance. In this scenario, you could potentially get a credit limit of up to $20,000.Home Equity Line Of Credit Example
What Kind Of Interest Rate Can You Expect With A HELOC?
The interest rate you’re charged on debt typically depends on your financial situation and how the economy is doing. But, in general, HELOC interest rates are slightly higher than mortgage loan rates. However, they are usually lower than personal loan or credit card rates. Most HELOCs have variable rates, so your interest rate will change with fluctuations in the market. It’s possible to get a HELOC with a fixed rate, but it’s important to know that fixed-rate HELOCs typically restrict how many times you can withdraw money and the maximum amount you can withdraw each time. Before applying for a HELOC, shop around and compare lenders to help you get the best deal. If you can’t find a lender that offers an attractive rate, it may be a sign that you need to improve your credit before shopping around. If you're considering a cash-out refinance instead of a HELOC, familiarize yourself with current refinance rates.Do HELOCs Have Fixed Or Variable Interest Rates?
How Can You Get The Best Rate For A HELOC?
4 Common Ways To Use A HELOC
HELOCs are a flexible way to leverage the equity in your home. There are no restrictions on how you use the funds. Let’s get more in-depth about some common ways to use a HELOC. If you need money to improve your home and increase its value, it can make sense to tap into your home’s existing equity using a HELOC. Some improvements are more valuable than others. A full kitchen remodel will likely give you a dollar-for-dollar return on your investment, but less extensive improvements can add value to a home. Finishing your basem*nt or updating your home’s interior with a fresh coat of paint can also boost your home’s value. If you have a lot of high-interest debt, such as credit card debt, a HELOC can help you consolidate all that debt into a single, lower-interest loan that can potentially save you hundreds of dollars in interest. When you use a HELOC to consolidate credit card debt, you’re trading unsecured debt for debt secured by your home. You can lose your home if you default on the HELOC. Medical bills can easily cost thousands of dollars for even the most basic procedures and care. With a HELOC, you may be able to pay off your medical bills and make repayments on your line of credit at a lower interest rate, saving you money in the long run. Some homeowners use home equity to pay for their own or their children's college education. While this can make sense in some situations, you should explore all your options. If you or your child qualify for federal student loans, you may get a lower interest rate than a HELOC’s rate. And federal student loan protections and flexible payment plans may make federal loans more advantageous.1. Make Home Improvements Or Repairs
2. Consolidate Debt
3. Pay Off Medical Bills
4. Pay For Higher Education
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What Are Alternatives To A HELOC?
If you aren’t interested in opening a home equity line of credit, there are other ways to tap into your home’s equity. A cash-out refinance and home equity loan are two available options. A cash-out refinance allows you to refinance your current mortgage loan, meaning you replace your existing mortgage. A cash-out refinance replaces your existing mortgage with a new one for a higher amount so you can pocket the difference. A cash-out refinance may be a better choice than a HELOC if you only want one loan on your property and one mortgage payment to make each month. And cash-out refinances typically have more attractive rates. Home equity loans and HELOCs are similar because they’re both secured by your home equity. With a home equity loan, you borrow a lump sum and pay it back at a fixed interest rate. Like a HELOC, a home equity loan uses your home as collateral. Unlike HELOCs, you can’t add additional funds to a home equity loan, so you must know how much money you need upfront.Cash-Out Refinance Vs. HELOC
Home Equity Loan Vs. HELOC
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FAQs About HELOCs
We’ve gathered a few commonly asked questions about HELOCs. Home equity is your home’s value minus what you owe your lender. Each time you make a payment on your mortgage, you add to the amount of your home that you own. Yes, you can pay off a HELOC early. HELOCs typically don’t have prepayment penalties. The best time to pay off the principal is during the draw period when you only pay back interest. Paying extra toward your principal during this time can help you avoid paying more during the repayment period. It typically takes less time to close on a HELOC than a traditional mortgage. In most cases, you should expect to close within 45 days of submitting your application. The biggest difference between a HELOC and a home improvement loan is that a HELOC borrows against the existing equity in your home, while a home improvement loan doesn’t. Because of this, home improvement loans have lower borrowing limits. And they may have higher interest rates than HELOCs.How does home equity work?
Can I pay off a HELOC early?
How long does the closing process take for a HELOC?
What’s the difference between a HELOC and a home improvement loan?
The Bottom Line
If you need a large sum of cash on a revolving basis to fund your home improvements, a HELOC may be a good choice. A home equity loan may be a better option if you know exactly how much money you need for a project and prefer a fixed monthly payment plan. Talk to a Rocket Mortgage Home Loan Expert to learn more about tapping into your home’s equity. They can help you navigate home equity and refinancing options. Start a refinance application online today to learn more.
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