Are you thinking about tapping into your home’s equity to pay off debt or cover a major expense? Taking cash out isn’t your only option. A home equity line of credit, or HELOC, gives you flexibility to access a large sum, but only take money out as you need it. You only have to make payments on the amount you’ve actually borrowed, which helps keep your payments and interest lower. A HELOC can give you peace of mind in the face of unpredictable expenses like home improvements or college tuition, without borrowing more than you need. The best home equity line of credit is one that offers a low rate, high borrowing limit, and a trustworthy lender.
HELOCs are lines of credit secured by your home.
Make sure your interest rate is low, to avoid ballooning fees.
The process should be similar to your original mortgage.
In a standard refinance, you take out a new loan that replaces your original mortgage. There are different types of refinances—from lowering your rate or changing your term to taking cash out. In almost all cases, you'll have just one loan. A HELOC is different.
A HELOC is separate from your first (original) mortgage. It’s a second loan secured by your equity in the house—the current value of the property minus what you still owe. Unless your home is paid for, you’ll have two payments to make. But, depending on the amount you borrow, your HELOC payment can be very low. Even if you’re approved for a large amount of credit, you’ll only be paying on the funds that you actually borrow.
The actual amount you can access depends on a variety of factors—like your lender and your home. Here at Lower, we offer a HELOC up to 95% loan-to-value (LTV) while the industry standard is only 80%. The difference between 80% and 95% LTV can increase the amount you can access by tens of thousands of dollars.
For example, If your home is valued at $250,000, you can finance up to 95% of that total, which is $237,500. If you still owe $150,000, you’ll have to figure that into financing, which leaves you with a total $87,500 for your HELOC. If you don't want to do the math yourself, just calculate it.
Regardless of however much you are approved to take out, when you're not using those funds, you don’t pay any interest. If you spend, say, $10,000 for a kitchen remodel, you’ll only make payments on that amount. As you pay down that balance, your payments will go down. But you can dip in and borrow more at any time.
Since it’s a revolving source of funds with a credit limit, a HELOC behaves a lot like a very low interest credit card. The rate is significantly lower than traditional credit cards or personal loans because it is secured by your home. You can typically access cash from the account by online transfer or by using a check or debit card connected to the account.
A HELOC behaves like a very low interest credit card. It’s secured by your home, so the rate is significantly lower.
Many homeowners take out a HELOC for home improvement projects—using their home’s equity to improve their home’s value. A line of credit is the perfect tool for this since it’s difficult to predict the total cost of most projects ahead of time.
College is another big-ticket item that can be difficult to estimate ahead of time. Most parents have no idea what the final bill of the semester is going to look like or how much they should set aside for dorm furniture, spending money, and travel expenses. Having access to a large amount of credit at a reasonable rate can be a tremendous comfort during the college years.
Paying off personal debt with a lower-interest HELOC can also be smart financial move. Unsecured loans like credit cards and personal loans typically carry much higher interest rates than mortgage-backed loans like HELOCs because unsecured loans aren't backed by any collateral. HELOCs also offer longer terms so you can make much smaller monthly payments. Lower payments and less interest expense can put you on the road to better long-term financial health.
Most HELOCs have adjustable rates, meaning they go up and down over time. Typically, the interest rate will be based on an index rate plus a personalized markup that is based on factors like credit score and debt obligations. If you’re perceived as a low-risk borrower, your rate will be lower. High-risk borrowers have to pay higher rates.
Questions to ask about your rate:
The periodic and lifetime caps determine how high your loan rate could go in the future.
Is a HELOC right for you? Weigh your options using these pros and cons.
A HELOC’s variable rate can be an advantage or a disadvantage, depending on rate trends.
As an industry standard, most lenders allow you to take up to 80% of your home’s value out in a HELOC. Here at Lower, we offer up to 95%—and the difference can be huge. To use the example above, if your home is valued at $250,000 and you still owe $150,000, your 95% LTV HELOC would be up to $87,500. At 80% LTV, it would only be $50,000. That’s a big difference in how much you can access.
Applying for a HELOC is simple here at Lower. Step 1: Calculate the funds available to you. Step 2: Apply. We don’t require a hard credit pull just to see if you qualify, so you can check out what you qualify for without commitment.
After you’ve submitted your application, getting qualified for a HELOC is very similar to applying for a mortgage or refinancing.
Sure—the process may take some time and there are expenses associated with a HELOC, but once you’re approved, you won’t have to jump through hoops to access your equity. It will be available whenever you need it.
You may want to make home improvements, fund a college education or pay down debt. Whichever your situation, a HELOC can offer flexibility and easy access to cash when you need it, and at an affordable rate.