What is a Home Equity Line of Credit? What It Is and How It Works!

Today, we’ll answer these questions:

What is a Home Equity Line of Credit (HELOC)? How do I qualify for one? What can I use the funds for?

A HELOC loan is a versatile and flexible way to tap into the value of your home to fund various expenses. 

In this blog, we’ll delve into the process of obtaining a HELOC loan and explore the qualifications you need to meet to secure one.

Understanding a HELOC Loan: A Brief Overview

Before we dive into the loan application process and eligibility criteria, let’s understand what a HELOC is. 

What is a Home Equity Line of Credit?

A Home Equity Line of Credit (HELOC) is a type of revolving credit that uses your home as collateral.

It allows you to borrow money up to a predetermined credit limit, like a credit card. 

However, what sets HELOCs apart is that the collateral is your home.

This means that if you’re unable to repay the loan, your home could be at risk of foreclosure.

Qualification Criteria for a HELOC Loan

• Equity in Your Home: The primary factor that determines your eligibility for a HELOC loan is the amount of equity you have in your home. Equity is calculated by subtracting the outstanding mortgage balance from the current market value of your property. Lenders typically require a certain level of equity, often around 15-20%, before considering your application.

• Credit Score: Like most loans, your credit score plays a significant role in determining your eligibility for a HELOC loan. A higher credit score demonstrates your ability to manage debt responsibly. While specific credit score requirements vary by lender, having a good to excellent credit score (usually 660 or higher) will increase your chances of approval and may lead to better interest rates.

• Income and Debt-to-Income Ratio (DTI): Lenders want to ensure that you can comfortably manage your HELOC payments alongside your other financial obligations. Your income and DTI ratio, which compares your monthly debt payments to your gross monthly income, are crucial factors in this assessment.

• Loan-to-Value Ratio (LTV): Like equity, the LTV ratio considers the proportion of your home’s value that you want to borrow against. Lenders often have limits on the LTV ratio they’ll accept, typically around 80%. This means you can borrow up to 80% of your home’s value, considering both your existing mortgage and the HELOC.

• Stable Homeownership and Employment: Lenders prefer borrowers who have a consistent history of homeownership and employment. Demonstrating stability in these areas adds credibility to your application.

The Process of Obtaining a HELOC Loan

• Research and Choose a Lender: Start by researching reputable lenders that offer HELOC loans. Compare their terms, interest rates, fees, and customer reviews to make an informed decision.

• Apply: Once you’ve selected a lender, submit an application. This often involves providing information about your property, income, credit score, and the amount you’re looking to borrow.

• Property Appraisal: The lender will likely require a professional appraisal to determine the current market value of your home. This step helps calculate your equity and loan-to-value ratio.

• Underwriting: The lender’s underwriting team reviews your application, credit history, income, and other factors to assess your eligibility and determine the terms of the HELOC.

• Approval and Credit Limit: If approved, you’ll receive an offer outlining your credit limit, interest rate, draw period (the time you can access funds), repayment period, and any associated fees.

• Acceptance: Review the offer carefully and accept it if you’re comfortable with the terms.

• Accessing Funds: During the draw period, you can access funds from your HELOC as needed. This is often done through checks, a credit card, or electronic transfers.

• Repayment: The draw period is followed by the repayment period. You’ll need to make regular payments to repay both the principal and interest. The repayment period’s duration and terms were specified in the loan offer.

Are Home Equity Loans Tax Deductible?

Yes, home equity loan interest is often tax deductible under specific conditions. 

According to the Tax Cuts and Jobs Act (TCJA), interest on home equity loans may only be deductible if the funds are used to buy, build, or substantially improve the home that secures the loan.

Calculating HELOC Payment: What is the Monthly Payment on a $50000 HELOC?

The monthly payment on a $50,000 Home Equity Line of Credit (HELOC) can vary based on several factors, including the interest rate, draw period, repayment period, and any additional fees associated with the loan. 

HELOCs typically have two phases: the draw period, during which you can access funds, and the repayment period, when you start repaying the principal and interest.

Here’s a simplified example to give you an idea:

Assumptions:

• $50,000 initial credit limit

• 5% annual interest rate

• 10-year draw period (interest-only payments)

• 20-year repayment period

During the draw period, you might only need to pay the interest on the outstanding balance. 

So, if your initial draw was $50,000 and the interest rate is 5%, your monthly interest payment would be:

$50,000 * 0.05 / 12 = $208.33

Keep in mind that during the draw period, you’re not required to make payments towards the principal, so your payment will consist only of the interest.

Once the repayment period begins, you’ll need to start paying both the principal and interest. The exact monthly payment will depend on the remaining balance and the interest rate during the repayment period.

Can District Lending Help With a HELOC Loan?

Yes! With years of experience assisting clients across different states, District Lending is well equipped to offer valuable assistance and support throughout the HELOC process. 

We will help you comprehend the terms and obligations involved in a HELOC loan.

When considering District Lending for a HELOC loan, here’s what you can expect:

• Information and Consultation: District Lending will provide you with information about their HELOC offerings, including interest rates, fees, draw periods, repayment terms, and eligibility criteria. District Lending also offers online tools or calculators to help you estimate potential loan amounts and payments.

• Application Process: If you decide to proceed, you’ll need to apply. This involves providing information about your property, income, credit history, and the amount you’re seeking to borrow.

• Property Appraisal: District Lending will require an appraisal of your property to determine its current market value. This is essential for calculating your equity and establishing your loan-to-value ratio.

• Underwriting: District Lending will review your application, credit history, income, and property details to assess your eligibility for the HELOC.

• Approval and Terms: If approved, District Lending will provide you with the terms of the HELOC, including the credit limit, interest rate, draw period, repayment period, and any associated fees.

• Accessing Funds: During the draw period, you can access funds from the HELOC as needed. This can often be done through checks, a credit card, or electronic transfers.

• Repayment: Once the draw period ends, the repayment period begins. During this phase, you’ll need to make regular payments that include both principal and interest.

Conclusion & Wrap-Up

Home Equity Line of Credit (HELOC) loans are a powerful tool that empowers homeowners to utilize their properties equity, for various purposes. 

It’s essential to understand the qualification criteria and application process to make decisions. By fulfilling requirements related to equity, credit score, income and stability individuals can position themselves for HELOC approval. 

The application process involves conducting online research, selecting a lending company, applying, underwriting, and if successful, gaining access to funds during the draw period. 

As homeowners navigate through the intricacies of HELOCs, seeking advice from experts and comparing terms offered by lenders can ensure that they choose a path that aligns with their short term needs and long term financial goals.

About the Author

Brian Reese is a senior advisor and co-owner at District Lending. He is one of the world’s leading experts in veteran benefits, having helped millions of veterans secure their financial future since 2013. Brian is the founder VA Claims Insider, an education-based Coaching & Consulting company whose mission is to educate and empower veterans to get the VA disability benefits they’ve earned for their honorable service. A former active-duty air force officer, Brian deployed to Afghanistan in support of Operation Enduring Freedom. He is a distinguished graduate of management of the United States Air Force Academy and earned his MBA as a National Honor Scholar from the Spears School of Business at Oklahoma State University.

In Brian’s Words:

“As a military veteran, I’ve made it my life’s mission to help people live happier and wealthier lives. District Lending brings this mission to life. We believe in integrity, honesty, and transparency, which is why you’ll see our rates right on our website. You’ll find lower rates and zero lending fees, which means you can buy your dream home for less. The savings are passed on to you — the way it should be.”

– Brian Reese, Advisor and Co-Owner, District Lending