The key to homeowner financial flexibility: Home Equity Line of Credit

The evolution from a house to a home looks different for everyone. While some are buying new homes to accommodate a growing family, others are creating new value in existing spaces. If the housing market is proving more challenging than exciting for you, consider making the home you have now more valuable or inspiring. When the time comes to sell, you’ll be glad you did. Who knows, maybe you’ll like the updates so much you won’t want to move on!

If you’re wondering how you’ll finance turning your current house into your dream home, look no further than the homeowner’s key to more financial flexibility: a Home Equity Line of Credit (HELOC).

What is a HELOC?

A HELOC is a revolving line of credit that allows a homeowner to borrow money against the equity of their home, as needed. Since it’s backed by such a valuable asset, a HELOC will generally have a lower interest rate than unsecured debt, like credit cards.

Once you’ve been approved, you can borrow as much or as little as needed (based on your loan approval) during the period of time known as the draw period. That time window varies based on the lender. When that time ends, you can no longer borrow funds and will have to finish paying back 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.

Every lender will have their own limitation on how much clients may borrow against their home’s equity. For example, Bay Federal HELOC loan amounts are offered up to $400,000 on eligible lines of credit. Be sure that you understand the details, such as minimum and maximum limits, annual fees, and repayment terms.

Is every homeowner eligible for a HELOC?

As with every loan and line of credit, HELOCs have eligibility requirements. Exact criteria will vary, but many lenders will only approve homeowners who have a debt-to-income ratio of 48% or less, a credit score of 680 or higher, and a combined loan-to-value ratio not exceeding 80% of the home’s appraised value.

While this process includes a variety of qualifications and documentation requirements, there is help available. A conversation with a Bay Federal Home Loan Consultant can help you understand the process and determine if a HELOC is the right move for you!

A HELOC is a revolving line of credit that allows a homeowner to borrow money against the equity of their home, as needed. Credit: Getty Images/iStockphoto

How do I repay my HELOC?

With every HELOC comes a draw period and a repayment period, however the length of these periods and the payment expectations vary with each lender.

The draw period typically ranges from 10 to 15 years. During this time, you’ll be able to withdraw as much or as little as needed from your HELOC, while also making interest only payments. If your lender allows, you may be able to start making payments towards the principal during this time.

Following the draw period, you enter the repayment period, where you’ll be required to start making principal payments, if not already. While making these new principal payments you’ll continue to make interest payments.

The entirety of the process is dependent on many factors, and with the additional options to flex or lock-in your rate it is important to discuss the reality of your goals with a home loan professional.

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 for frivolous or risky purchases. Because your loan is backed by your home itself, you’ll want to be sure you are making a good investment with the funds. It’s best to use a HELOC to pay for something that has lasting value, such as a home improvement project. Remodel your kitchen, bathroom, or create a new addition to your home or yard – the possibilities are endless.

If you’re a homeowner in need of some extra cash, consider taking out a HELOC Flex with Bay Federal. Visit https://www.bayfed.com/heloc-flex to begin an application or contact a Home Loan Consultant. We’re here to help you achieve the home of your dreams.