The home equity line of credit. It’s kind of like a mortgage and kind of like a credit card. Usually it’s a viable option when you’re looking to finance renovations to your home to eventually increase its value. Let’s break this down.
Your lender agrees to lend a maximum amount for a certain amount of time. You can then tap into that money throughout the life of the loan. However, as you pay off the principal of the loan, the funds continue to revolve. The interest rate is typically a variable rate, meaning the interest can fluctuate throughout the life of the loan. Most commonly, the typical loan is between ten to fifteen years and at the end of the term, one has an option to make a “balloon” cash- payment. Alternatively, the client can refinance the remainder into a new line of credit or loan.
How a Home Equity Line of Credit Works
The life of a home equity line of credit into different phases. Each phase when you’re eligible to withdraw funds, when withdrawal ends, and when the amount withdrawn must be paid back to the lender.
Draw Period: This is when you can access funds from your home equity line of credit. If you choose to make payments to your HELOC during the draw period, you must meet the minimum payment amount established. Typically, these payments are applied only to the interest of the HELOC.
Repayment Period: During this time your payments are put toward both the principal and interest of the HELOC.
Benefits of a Home Equity Line of Credit
Lower Interest Rates: the interest rates on a home equity line of credit are typically lower than a credit card because it is secured by your home.
Revolving Funds: There is a maximum withdrawal amount, but as you make principal payments, the funds continue to refresh and can be taken out again within the draw period.
Tax benefits: The interest in your home equity line of credit may be tax-deductible, like your mortgage.
Calculating Your Home's Equity
The equity on your home is equivalent to the market value of your property minus the amount owed in mortgage debt. Basically, the formula looks like this:
Home’s Equity = Home Value – Mortgage Debt
So, if the value of your property is worth $300,000 and you owed $200,000 on the mortgage then the equity would be $100,000.
Required Equity Amount for a Home Equity Line of Credit
Most FIs lend up to 75% - 80% of your home’s current market value minus the amount owed in mortgage debt.
How to Get a Home Equity Line of Credit
Various financial institutions offer HELOC’s including major banks, credit unions and private lenders.
Requirements for a Home Equity Line of Credit;
Interested in a Home Equity Line?
Let Bundlefi help connect you to the right Community Bank or Credit Union.