What Is a HELOC and How Is It Helpful?

In 2024, home equity line of credit in the U.S. increased significantly, with lenders originating about 671,000 loans in the first two quarters. To qualify for HELOC loans, you need at least 20% to 15% equity in your home.

By using home equity, you may be able to access funds at a lower interest rate in the form of HELOC as compared to other types of loans. Consider getting pre-approval to know how much mortgage you can get.

What Is a HELOC Loan?

A home equity line of credit is flexible access to funds secured against your home equity’s. It is the home’s value minus the amount you owe on the primary mortgage. Although this varies by lender, you can typically borrow up to 85% of your equity.

Home equity loans are often significant for purposes like debt consolidation, home improvements or other needs that require significant funds.

How Does a HELOC Work?

HELOC’s give you flexible access to funds, which you can pay back and keep borrowing. They often also offer low interest rate because they are secured against your house and not the market.

A HELOC typically has 2 phases:

1. Draw Period

It is the initial period that lasts up to 10 years, where you can get access to funds against your home equity as a line of credit. You will only pay interest on the amount you borrowed during this time. 

2. Repayment Period

Once your draw period for HELOC ends, you enter the repayment period. You now have to make regular payments to pay off the outstanding balance on your HELOC. And also you will not be able to borrow from your credit line.

The length of the repayment period can vary depending on the terms of your specific HELOC agreement, such as 10 or 15 years. 

Home Equity Line of Credit Requirements 

You must fulfill these 3 criteria’s to be eligible for home equity line of credit:

1. Debt-To-Income (DTI) Ratio

Your debt-to-income ratio measures how much debt you have relative to your income. Lenders assess your ability to repay a HELOC using your debt-to-income ratio. A ratio of 40% or less can improve your chances of approval.

2. Loan To Value Ratio (LTV) 

LTV is the difference between the amount owed on your mortgage and the current market value of your house. Your chances of getting approved for a larger line of credit increase when you have at least 15% more than what you owe. 

3. Credit Score

You need a credit score of 620 or higher to secure favourable terms, though this can vary between lenders. Higher credit scores means a lower interest rates for you.

How to Get HELOC?

To apply for HELOC loan rates, you must follow the steps below: 

Step 1: Check Your Needs: If you have a large expenses coming up like debt consolidation, medical bills to pay or home renovation. You can apply for a HELOC by understanding your financial goals to get the best amount.

Step 2: Check Your Eligibility: Calculate the equity you have in your home and see if you qualify. Also make sure you check your credit score, DTI ratio and LTV. It will give you an idea of how much you can borrow. 

Step 3: Compare Mortgage Lenders: You should compare lenders because they charge different fees and HELOC rates. Ideally, look for a mortgage lender who offers pre-approval without any impact on credit score.

Step 4: Collect Required Documents: When applying for a HELOC, gather important documents like proof of income, tax returns, and property documents.

Step 5: Apply for a HELOC: Submit your application to the selected lender or multiple lenders within 45 days to avoid any impact on your credit score.

Step 6: Credit Check and Appraisal: The lender will conduct a credit check to assess your creditworthiness and an appraisal to determine your home’s value.

Step 7: Approval of HELOC Loan: Once the lender cross-checks all details and your credit and appraisal report. He will decide whether to approve or deny your HELOC application.

Step 8: Apply for HELOC Closure: You will close on the HELOC after reviewing the terms and agreeing to them. It involves document signatures and then getting the funds approved. 

What are Home Equity Alternatives? 

The best option for you will depend on your objectives, financial status, and particular needs. The alternatives to home equity are:

HELOC vs. Home Equity Loan

Home Equity Loan	HELOC
A home equity loan offers a fixed-rate lump sum, repaid over a set term, ideal for large home renovations or debt consolidation.	It provides a revolving credit line with a variable interest rate, letting you borrow as needed up to a pre-approved limit and pay interest only on the amount used.

Cash-Out Refinance vs. HELOC

Cash-out Refinance	HELOC
This option refinances your loan with a higher mortgage, increasing both interest rates and total debt.	A HELOC lets you borrow against home equity without refinancing, which can help avoid increasing your monthly mortgage payment.

HELOC vs. Reverse Mortgage

HELOC	Reverse Mortgage
Homeowners needing funds while keeping property ownership can consider a HELOC.	A reverse mortgage allows homeowners 62+ to access home equity as cash, repaid only when the home is sold or the owner moves out.

HELOC vs. Personal Loan 

HELOC	Personal Loan
It is secured by your home, a HELOC offers lower rates and higher loan limits, but defaulting risks foreclosure.	A personal loan is unsecured, with higher interest rates and smaller loan amounts than a HELOC.

Pros and Cons of a HELOC

Before considering a HELOC here are some pros and cons to consider: 

Pros of HELOC:

• Flexible Fund Access: You can borrow as needed and up to a pre-approved limit instead of getting a lump sum amount. 
• Tax Benefits: Interest on HELOC is tax deductible depending on how you use the funds.
• Lower Interest Rates: It offers lower interest rates than other credit forms. It will also help you save money on interest charges over time. 

Cons of HELOC:

• Foreclosure Risk: If you default to make payments, it could lead to losing your home. As your property secures it. 
• Repayment Challenges: After the draw period, payments may rise significantly due to both principal and interest payments. 
• Variable Interest Rates: The rates can fluctuate, potentially increasing your monthly payments over time.

What Is Better Home Equity or Line of Credit? 

Home equity loans and lines of credit have their benefits. While HELOCs operate similarly to credit cards with a revolving line of credit, home equity loans offer an upfront lump sum payment. You can choose a home equity loan if you need a fixed amount. 

HELOCs are better for ongoing expenses or projects with uncertain costs. So, before deciding, consider your financial expenses and the needs for your project. Furthermore, Houzeo can help you compare rates and terms and connect you with lenders. 

Frequently Asked Questions

• Buyer
• Home equity line of credit