All You Need to Know About HELOCS

couple painting room in house

If you’re a homeowner in need of some extra cash, look no further than your own home. By tapping into your home’s equity, you may be eligible for a Home Equity Line of Credit, or a HELOC. Let’s take a closer look at HELOCs and why they can be a great option for homeowners who need extra cash.

What is a HELOC?

A HELOC is a revolving credit line that allows homeowners to borrow money against the equity of their home, for a specific time period. Since a HELOC is backed by a valuable asset (the borrower’s home), the HELOC is secured debt that generally has a lower interest rate than unsecured debt, like credit cards or personal loans. There may be closing costs that have to be paid, which are typically between to 2-5% of the total value of the loan. However, if you open a HELOC at Partner Colorado, you may not have to pay closing costs.*

How much money can I borrow through a HELOC?

The amount of money you can take out through a HELOC will depend on the total value of your home. The lenders allow you to borrow up to a percentage of that value of your home, minus any outstanding home loans on the property.

Many lenders will only allow homeowners to borrower up to a loan-to-value (LTV) ratio of 80% or lower. At Partner Colorado we allow up to 90% LTV on most No-Closing Cost HELOCs.

A quick way to find a good estimate of the maximum amount you can borrow with a HELOC is to multiply your home’s value by the highest LTV the lender allows.

For example:
If your home is valued at $250,000 and your lender allows you to borrow up to 80% of your home’s value, multiply 250,000 by 0.80. This will give you a value of $200,000. Subtracting the amount you still owe on any outstanding mortgages (let’s say $100,000) gives you the maximum amount you can borrow using a HELOC, which is $100,000.

You can also use our free home equity calculator to do the work for you.

Is every homeowner eligible for a HELOC?

Like every loan and line of credit, HELOCs have eligibility requirements. Exact criteria will vary, but most lenders will only approve the line of credit for homeowners who have a debt-to-income ratio of 40% or less, a credit score of 620 or higher and a home with an appraised value that is at minimum 15% more than what is owed on the home. You can also apply for a HELOC on a secondary home, but typically the rates can be higher and the approved LTV is less.

How does a HELOC work?

A HELOC works similarly to a credit card. Once you’ve been approved, you can borrow as much or as little as needed during the draw period. Some financial institutions will require a minimum on the initial draw, be sure to find out what that is. The draw period generally lasts five to 10 years. Once the draw period ends, the borrower has the choice to begin repaying the loan, or to refinance with new loan terms.

How do I repay my HELOC?

The repayment schedule for a HELOC can take one of three forms. Some lenders allow borrowers to make payments toward the interest of the loan during the draw period. When the draw period ends, the borrower will make monthly payments toward the principal of the loan in addition to the interest payments.

For many borrowers, though, repayment only begins when the draw period ends. At this point, the HELOC generally enters its repayment phase, which can last up to 20 years. During the repayment phase, the homeowner will make monthly payments toward the HELOC’s interest and principal.

In lieu of an extended repayment phase, some lenders require homeowners to repay the entire balance in one lump sum when the draw period ends. This is also known as a balloon payment. This would be the least of all the options to select, if you had an option.

How can I use the funds in my HELOC?

It’s generally a good idea to use a HELOC to pay for something with lasting value, such as a home improvement project. You can also use a HELOC to pay off credit card debt, pay for college tuition, fund a vacation or make a large purchase. Keep in mind, if you default on your repayments, you risk losing your home, so it’s important to know you can repay your HELOC when the time comes.

How is a home equity line of credit different from a home equity loan?

A home equity loan is a loan in which the borrower uses the equity of their home as collateral. Like a HELOC, the homeowner risks losing their home if they default on it. Here, too, the exact amount the homeowner can borrow will depend on their LTV ratio, credit score and debt-to-income ratio.

However, there are several important differences between the two. Primarily, in a home equity loan, the borrower receives all the funds in one lump sum. A HELOC, on the other hand, offers more freedom and flexibility as the borrower can withdrawal funds, as needed, throughout the draw period. Repayment for home equity loans also works differently. The borrower will make steady monthly payments toward the loan’s interest and principal over the fixed term of the loan.

A home equity loan can be the right choice for borrowers who know exactly how much they need to borrow and prefer to receive the money up front. Budgeting for repayments is also simpler and can be easier on the wallet since they’re spread over the entire loan term. Some borrowers, however, may also anticipate being in a better financial place when the repayment phase begins, so they don’t mind the payment structure.

If you’re a homeowner in need of some extra cash, consider taking out a HELOC through Partner Colorado. Call, click, or stop by today to get started!