Understanding Home Equity Lines of Credit and How to Utilize Them

One term you've likely heard a number of times in the mortgage world, but may not totally understand how to take advantage of, is equity in a home. Equity is the difference between what you owe on the mortgage and the value of your home on the market, and high equity allows you to do a number of things -- one of which is the home equity line of credit, or HELOC.

At Integrity First Lending, we're here to help with a wide variety of mortgage services, from several origination programs to mortgage refinancing and much more. We'll inform you of all the important factors surrounding home equity, including when it might be a good time to consider a HELOC for your needs. What exactly is a HELOC, how can you find out if you're eligible for one, and when might be some good times to consider utilizing one? Here's a basic primer.

What is a Home Equity Line of Credit (HELOC)?

First and foremost, let's define what a HELOC actually is. A HELOC is a loan that's secured by your home equity, which as we stated before is the value of your home minus any outstanding mortgage debt. You can generally borrow up to around 80% of your home's value through a HELOC if you qualify, though this number may differ depending on the lender.

HELOCs act a lot like credit cards in that you're approved for a maximum loan amount, but you're not required to use all of it at once (or at all, for that matter). You can borrow funds as needed and make minimum monthly payments on the outstanding balance, or pay off the HELOC entirely without any penalty.

HELOCs also generally have variable interest rates, meaning that the rate can go up or down over time in response to changes in the market. However, some HELOCs offer a fixed-rate option for a certain period of time (typically 5-10 years), after which the interest rate will revert back to being variable.

Benefits of HELOCs

Now that we know what a HELOC is, let's look at some of the key benefits:

• Access to funds as needed: Since you're only required to make minimum monthly payments on a HELOC (and can pay it off entirely without penalty), this type of loan gives you easy access to cash as needed.
• Flexibility in repayment: You can also usually choose how you want to make payments on a HELOC, whether that means making interest-only payments or paying down both the principal and interest each month.
• Tax deductions: Interest paid on HELOCs is often tax-deductible (consult a tax advisor for more information).
• Potential to save on interest: While HELOCs do have variable interest rates, if you only use the funds when rates are low, you may be able to save on interest overall.

Eligibility for a HELOC

Now, you must be aware that there are some qualification guidelines for HELOCs, and not everyone necessarily meets them. They include:

• Good credit score: While the precise credit score required for a HELOC will vary by lender, you'll likely need a score of at least 680 to qualify.
• Equity in your home: As we stated before, your home equity (the value of your home minus any outstanding mortgage debt) must be high enough to qualify for a HELOC.
• Ability to repay: Lenders will also want to see that you have a steady income and the ability to repay the HELOC.
• Average monthly income: You should also have an average monthly income that's sufficient to cover your current debts, as well as any additional payments you'll need to make on the HELOC.
• Monthly debts: Lenders will also consider other monthly debts you have, such as credit card payments, student loan payments, and so on. They'll want to see that your debt-to-income ratio (DTI) is low enough to qualify for a HELOC.

How HELOCs Are Often Utilized

Here are some of the most common ways homeowners tend to utilize HELOCs:

• To pay down other debt: In some cases, a HELOC can be used to pay off other debts, such as credit card debt or student loans. This can often be a good idea because HELOCs tend to have lower interest rates than other types of debt.
• To make home improvements: Homeowners also sometimes use HELOCs to finance home renovations or repairs.
• To cover emergency expenses: Another common use for HELOCs is to cover unexpected or emergency expenses, such as medical bills or car repairs.
• To invest in a business: Some entrepreneurs also use HELOCs to finance their business ventures.
• To pay for education: And finally, HELOCs can also sometimes be used to help pay for education, whether that's for a child going to college, or for the homeowner themselves to go back to school.

HELOCs can be a great financial tool for eligible homeowners, providing them with access to cash when they need it and offering a number of potential benefits. If you think a HELOC might be right for you, be sure to speak with your lender about qualification requirements and compare offers before moving forward. They will explain the underwriting guidelines and help you select the best option.

As you can see, a HELOC can provide you with a lot of flexibility in how you choose to use the funds. But before you apply, make sure you understand the qualification requirements and compare offers from multiple lenders to ensure you're getting the best deal possible.

For more on this, or to learn about any of our home loans or mortgage rates, speak to the team at Integrity First Lending.