Sometimes the tuition bill, the unexpected family trip, or the great deal on a coveted family purchase don't come when we planned if we even prepared for them. A home equity line of credit (HELOC) can come in handy in these circumstances.
Here’s how they work.
You must be a homeowner with equity in your home. That means you must out-right own a portion of your home or have paid down your loan to some degree. To figure your equity, take all debts secured by your home and subtract them from your home's appraised value. For example, a home appraised at $150,000 with a mortgage balance of $80,000; there is $70,000 in equity. You are using that equity as the guarantee or collateral for your loan.
There are two types of home equity loans, a loan and a line of credit. A home equity loan is for a set amount, and you receive the funds upfront. The line of credit has flexibility as it is structured more like a credit card. You receive approval for a certain amount of credit known as your credit line, and you then have access to it when you need it. One difference with the line of credit is that it has a set repayment timeframe ranging from 5-30 years. These lines of credit allow the borrower to withdraw funds for a maximum of 5 – 10 years, which is called the draw period. After the draw period expires, the line enters a repayment only status and no additional draws may occur. A credit card in good standing can stay open indefinitely but may not offer you a large enough credit line or may have a significantly higher rate. HELOCs require credit approval, and the minimum credit score is usually around 680.
What can you buy with your HELOC funds?
Before we get further into the nuts and bolts of finding a good home equity line of credit, think about how you can use the funds. Get creative. Use the funds for anything. You do not have to disclose what you’ll be spending the
money on when you apply. Generally, HELOCs help to pay for long-term and more significant expenses, such as:
- Vacations
- Weddings
- Appliances/HVAC
- Furniture
- Remodeling/Home Improvement
- Deck/Yard Improvement/Hot Tub
- Medical bills/procedures
- Tuition
- Vehicles*
What to look for in a HELOC
HELOC Rates, Terms, and Repayment
The three broad categories to pay attention to when you shop for a HELOC are rate, terms, and repayment.
HELOC Rates
A home equity line of credit will have a variable rate. The rate can go up or down with an index, such as the prime rate. Rates will generally have a cap; they can’t go up or down more than X% per adjustment and/or per year. The adjustable-rate allows you to know that you will get a competitive market rate whenever you need to draw on your HELOC. (It also allows your financial institution to remain solvent). Rates may also include a small percentage based on your loan-to-value or your credit score.
Terms
Upfront costs & origination fee- Be sure to ask your lender if there are origination fees or other expenses that require cash at closing. Sometimes these costs are charged to your credit line, rather than cash up-front. Ask before you apply.
Annual fee
Is there a yearly fee just for having the line open, even if you are not using it?
Appraisals
Are sometimes required but usually not a full assessment. Some institutions will waive the appraisal if they have a recent one on file. Check to see what the cost will be. CUA does not require appraisals for HELOCs.
Minimum
Does the lender have a minimum loan amount?
Repayment
HELOCs allow up to 10 years to withdraw funds and up to 20 years to repay. Timeframes may vary per financial institution.
Other side notes:
- Interest paid might be deductible on your taxes, depending on how you used the funds. Be sure to check with your tax advisor.
- A home equity line of credit requires credit approval. The minimum credit score is usually around 680.
CUA’s Home Equity Line of Credit
- At CUA, we figure your rate on an Index and your loan-to-value. The index is Wall Street Journal Prime Rate. Check current CUA rates.
- CUA will loan up to 100% of your house value.
- CUA uses the county value of your home. Generally, no appraisal is required.
- Rates only adjust every six months (vs. monthly like some HELOCs).
- Rate caps protect our members.
- A one-time fee is just 1% of the total line of credit.
- Try out CUA’s HELOC Calculator!
- CUA is an Equal Housing Lender.
- Apply today!
If you’re not sure if a home equity line of credit is your best option, discuss your situation with a CUA loan officer. They can evaluate your circumstances and help you choose the best traditional loan, line of credit, or credit card for your cash flow needs.
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