All You Need to Know About HELOCs

If you’re a homeowner in need of a bundle of cash, look no further than your own home. By tapping into your home’s equity, you’re eligible for a loan with a, generally, lower interest rate and easier eligibility requirements. One way to do this is by opening up a home equity line of credit, or a HELOC. Let’s take a closer look at HELOCs and why they can be an excellent option for cash-strapped homeowners. 

What is a HELOC?

A HELOC is a revolving credit line that allows homeowners to borrow money against the equity of their home, as needed. The HELOC is like a second mortgage on a home; if the borrower owns the entire home, the HELOC is a primary mortgage. Since it is backed by a valuable asset (the borrower’s home), the HELOC is secured debt and will generally have a lower interest rate than unsecured debt, like credit cards. You will need to pay closing costs for the line of credit, which are generally equal to 2-5% of the total value of the loan.

How much money can I borrow through a HELOC?

The amount of money you can take out through a HELOC will depend on your home’s total value, the percentage of that value the lender allows you to borrow against and how much you currently owe on your home. 

Many lenders will only offer homeowners a HELOC that allows the borrower to maintain a loan-to-value (LTV) ratio of 80% or lower. 

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, continuing with the above 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 $200,000. Subtract the amount you still owe on your mortgage (let’s assume $100,000) and you’ll have the maximum amount you can borrow using a HELOC: $100,000. 

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. 

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, and whenever you’d like during a period of time known as the draw period. 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 to a new loan. 

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 lHELOC’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. 

How can I use the funds in my HELOC?

There are no restrictions on how you use the money in your HELOC. However, it’s generally not a good idea to use a HELOC to fund a vacation, pay off credit card debt or to help you make a large purchase. If you default on your repayments, you risk losing your home, so it’s best to use a HELOC to pay for something that has lasting value, such as a home improvement project. 

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 distinctions 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 take out 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 would prefer to receive the funds up front. Budgeting for repayments is also simpler and can be easier on the wallet since they are spread over the entire loan term. Some borrowers, however, would rather have the flexibility of a HELOC. They may also anticipate being in a better financial place when the repayment phase begins, so they don’t mind the uneven payments. 

Your Turn: Have you taken out a HELOC? Tell us about it in the comments.

Learn More:
creditkarma.com
marketwatch.com
thepennyhoarder.com
investopedia.com

Essential Tools for Every New Homeowner

As a new homeowner, you likely have a long list of items you need or want to purchase for your new digs. From welcome mats to plungers and wall hangings, there’s lots to buy in the first weeks after moving day. As you browse through window treatments and home decor, don’t forget to stock up on the basic tools every new homeowner needs.

A well-stocked toolbox is essential for every homeowner, but choosing which tools to pack inside that kit can be confusing. What do you really need, and what’s just an extra? Can you get by with only one screwdriver, or do you have to spring for the whole set? So many questions — and we’ve got answers! We’ve compiled a guide to stocking a homeowner’s toolbox at every skill level. Happy fixing!

Basic tools

If you’ve never pretended to be a handyman, but you’d like to have basic tools in the house in case something needs minor repair, here’s what belongs in your toolbox:

  • Claw hammer. From hanging up pictures to securing loose railings, a hammer is your go-to tool for most basic jobs around the house. Consider also getting a lightweight pin hammer for smaller jobs.
  • Screwdriver set. It’s worthwhile to invest in a set of screwdrivers so you have various sized flat-heads and Phillips-heads handy for any kind of job. You can pick up a set of 10 screwdrivers at your local home improvement or hardware store, or order one from Amazon.
  • Pliers set. Here too, a set of different sizes and types is your best bet. Look for pliers with a good grip and that are sized well for your hands.
  • Adjustable wrench. A wrench will enable you to tighten or loosen virtually anything.
  • Allen wrench set. A universal allen wrench set will set you back just $10. You’ll use these wrenches anytime you order a piece of furniture that requires assembly.
  • Handsaw. A handsaw is great for trimming lumber and cutting through drywall, fiberglass and other thin materials.
  • Extension cord. Every house should have, at minimum, one indoor extension cord and another outdoor cord for jobs requiring electric tools.
  • Utility knife. Use this handy cutter to open boxes, hard plastic packages, shave wood and more.
  • Tape measure. A retractable 25-foot tape measure will come in handy when you need to measure space for new furniture or decor items. You may want to get a pocket-sized tape measure as well so you can bring it with you when you measure items at a store.
  • Hardware. Keep a generous selection of screws and nails on hand in case you need one in a hurry.
  • Level. A simple floating-bubble model will help keep your wall pictures and shelving straight.
  • Flashlight. It’s always a good idea to have a source of battery-powered light in case of an outage. Also consider a rechargeable flashlight that can be recharged by hand so you are never without a source of light.

The next step

Once you’ve filled your toolbox with the basics, and you become more skilled at around-the-house repairs, consider adding these more advanced tools to your collection:

  • C-clamp. When working on a woodworking project, a clamp will help you hold the wood in place.
  • Stud finder. This ingenious tool will keep you from creating unnecessary holes or drilling where nails already exist.
  • Cordless drill. A cordless drill has dozens of household uses, especially if you get into woodworking or light construction around the house.
  • Hacksaw. These are great for cutting through plastic and metal pipes, tubing, conduit and wood.
  • Safety gear. You’ll need safety goggles, ear protection and dust masks when using power tools.
  • Putty knife. Designed for applying spackle, you can also use your putty knife to remove old paint and to apply grout to tile floors and backsplashes.
  • Wire stripper. Perfect for cutting materials like aluminium, copper, brass, iron and steel, wire strippers are essential for the committed DIYer.

Advanced tools

If you’re exceptionally handy, consider adding these to your toolbox:

  • Sanders. Put the finishing touches on your woodworking projects with a power sander. For best results, you may want to invest in several types of sanders and use each one when it fits the job best. For example, a random orbital sander may be best for simple  home projects, while a belt sander is great for sanding rough surfaces and a rotary sander is your go-to choice for edge work.
  • Carpenter’s square. Made up of a metal ruler and interchangeable heads, a carpenter’s square is used to measure level, right angles, the center of a circle and to check depth. It can be an incredibly useful tool in complicated woodworking, metal and masonry projects.
  • Table saw. This power tool, also known as a saw-bench, is a mounted woodworking tool that is considered the workhorse of any well-equipped woodshop. A table saw can rip,
    cross-cut, miter-cut, square, rabbet and apply shapes to edges of wood stock.

Your toolbox is all set! Now you’ll be fully prepared for anything that needs fixing in your home.

Your Turn: What do you have inside your toolbox? Tell us about it in the comments.

Learn More:
thisoldhouse.com
movement.com
homedepot.com
hgtv.com
butlerheating.com
washingtonpost.com

Is it a Good Idea to Open a HELOC Now?

If you’re looking for a large sum of money to use for a home improvement project, or the economic devastation of COVID-19 has left you in desperate need of cash, consider tapping into your home’s equity. One great way to do this is by opening a home equity line of credit, or a HELOC. Let’s take a closer look at HELOCs and why they can be an excellent option for cash-strapped homeowners in today’s financial climate.

What is a HELOC?
A HELOC is a revolving credit line allowing homeowners to borrow money against the equity of their home. The HELOC is like a second mortgage on a home; if the borrower owns the entire home, the HELOC is a primary mortgage.

Given that a HELOC is a line of credit and not a fixed loan, borrowers can withdraw money from the HELOC as needed rather than borrowing one lump sum. This allows for more freedom than a loan and is especially beneficial for borrowers who don’t know exactly how much money they’ll ultimately need to fund their venture.

Borrowers withdraw funds (aka “draws” or “advances”) from the HELOC during a set amount of time that is known as the “draw period,” which generally lasts 10 years. Some lenders place restrictions on HELOCs and require borrowers to withdraw a minimum amount of money each time they make a draw, regardless of need. Other restrictions include the requirements to keep a fixed amount of money outstanding, or to withdraw a specific sum when the HELOC is first established. [At Advantage One Credit Union, we allow borrowers to ….]

How do I repay my HELOC?
Repayment of HELOCs varies, but is usually very flexible.
Many lenders collect interest-only payments during the draw period, with principal payments being strictly optional. Others require ongoing monthly payment toward both principal and interest.

When the draw period ends, some lenders will allow borrowers to renew the credit line and continue withdrawing money. Other lenders require borrowers to pay back the entire balance due, also known as a “balloon payment.” Still others allow borrowers to pay back the loan in monthly installments over another set amount of time, known as the “repayment period.” Repayment periods are generous, lasting as long as 20 years.

How can borrowers spend the money?
While home improvement projects are popular uses for HELOCs, borrowers are free to spend the money however they please. Some other uses for HELOCs include debt consolidation, funding a wedding, adoption, dream vacation or the launch of a new business.

Is everyone eligible for a HELOC?
Like every loan and line of credit, HELOCs have eligibility requirements, which help lenders determine the applicant’s financial wellness and responsibility. Most notably, the borrower must have a minimal amount of equity in the home.

Lender requirements vary, but most homeowners will be eligible for a HELOC with a debt-to-income ratio that is 40% or less, a credit score of 620 or higher and a home assessment that stands at a minimum of 15% more than what is owed.
How much can I borrow with a HELOC?

HELOC amounts vary along with three criteria: the value of your home, the percentage of that value the lender allows you to borrow against and the outstanding amount on an existing mortgage.

To illustrate, if you have a $300,000 home with a mortgage balance of $175,000 and your lender allows you to borrow against 85% of your home’s value, multiply your home’s value by 85%, or 0.85. This will give you $255,000. Subtract the amount you still owe on your mortgage ($175,000), and you’ll have the maximum amount you can borrow using a HELOC, which is $80,000.

What are the disadvantages of a HELOC?
A HELOC is secured by your home’s equity, which places your home at risk of foreclosure if the HELOC is not repaid. Before opening a HELOC, it’s a good idea to run the numbers to get an idea of what your monthly payments will look like and whether you can easily afford to meet them.

Also, many lenders require the full payment of the HELOC after the draw period is over. This can prove to be challenging for many borrowers.
Finally, if you don’t plan to stay in your home for long, a HELOC may not be the right choice for you. When you sell your home, you’ll need to pay off the full balance of the HELOC. You may also need to pay a cancellation fee to the lender.

A HELOC can be a great option now
HELOCs have variable interest rates, which means the interest on the loan can fluctuate over the life of the loan, sometimes dramatically. This variable is based on a publicly available index, such as the U.S. Treasury Bill rate, and will rise or fall along with this index, though lenders will also add a margin of a few percentage points of their own.
The fallout of COVID-19 may impact the economy for months, or years, to come; however, there is a silver lining among the rising unemployment rates and bankrupt businesses: historically low interest rates. The average APR for fixed 30-year mortgages has hovered at the low 3% for months now, and experts predict it will continue falling. The low rates make it an excellent time to take out a HELOC with manageable payback terms.

The economic uncertainty the pandemic has generated also makes it a prime time to have extra cash available for any need that may arise.

Are you looking to tap into your home’s equity with a HELOC? Call or click today to get started. Our favorable rates, generous eligibility requirements, and easy terms, make a Advantage One Credit Union HELOC a great choice.

Your Turn:
How are you using your HELOC? Tell us about it in the comments.

Learn More:
www.huffpost.com
nerdwallet.com
thepennyhoarder.com
bankrate.com