Get answers to your questions about taking out a Home Equity Line of Credit (HELOC).
A home equity line of credit (HELOC) is one way to use your home’s equity to get cash to pay for expenses. If you’ve been considering getting a HELOC, here are some FAQs about what you should know about a HELOC to help with your decision.
- Can I use a HELOC for a down payment on an investment property?
- Which is better a HELOC or cash out refinance?
- Can I get a HELOC with bad credit?
- Are HELOC rates fixed?
- How long do you have to pay off a HELOC?
What does HELOC stand for?
A HELOC stands for Home Equity Line of Credit. It’s a type of loan that borrows against your home’s equity and uses your home as collateral for the line of credit. Learn more about what a HELOC is.
Is HELOC interest tax deductible?
The interest on a HELOC may be tax deductible, however, we recommend you consult your tax advisor for more details.
How much equity do I need for a HELOC?
It’s important to look at your loan-to-value ratio as many lenders limit equity borrowing to 80% loan-to-value. Even after you take out money from your equity, you may still be required to have at least 20% equity left in your home.
How long does it take to get a HELOC?
It generally will take between 30-45 days to get a HELOC. That would include time to process the application and confirm you meet the underwriting requirements.
Does a HELOC require an appraisal?
Yes, many lenders require an appraisal to determine the value of your home and how much equity you have available.
What is the difference between a HELOC and a cash-out refinance loan?
A HELOC is an open line of credit which allows you to access funds as needed. With a HELOC, there is a draw period and a repayment period. During the draw period, you are only required to make monthly payments of interest only on the amount of funds accessed. This is different than a cash-out refinance loan which provides you with a lump sum at closing. With a cash-out refinance, there is no draw period and repayment period. It’s important to compare interest rates and terms to find out which would be best for your needs. Learn more about the differences between a HELOC, home equity loan and a cash out refinance.
Can you refinance a HELOC?
Yes, you may be able to refinance your HELOC depending on your financial situation. If you’re in the repayment period and the interest plus principal payment is too high, you may want to consider refinancing. A refinance will reset your HELOC, so you’ll go back to the interest only draw period. Learn more about refinancing a HELOC and whether it’s the right choice for you.
How do you qualify for a HELOC loan?
There are a few requirements to qualify for a HELOC. You would need to have sufficient equity in your home. This is measured by your loan-to-value ratio, which is the difference between what you owe on your mortgage and how much your home is worth. A good credit score is also important for your lender to determine your eligibility and interest rate.
Does a HELOC affect your credit score?
Yes, a HELOC is a line of credit, so is it listed on your credit report. Like any credit card or loan, a home equity line of credit may affect your credit score if not paid back on time. Credit scores are determined, in part, by how much you use of your credit, so it’s important to pay your balances on time. Learn more about HELOC affects credit scores.
What happens if you sell a house with a HELOC?
A HELOC is a lien against your home and is based on the equity in your home, so when you sell your home you will need to pay off all liens or mortgages at closing.
Can I get a HELOC on a rental property?
Yes, some lenders allow you to use a HELOC to finance a rental property, but lending standards have tightened since the financial crisis. The qualifying criteria may be stricter and interest rates may be higher than purchasing a home that will be your primary residence.
What can I use a HELOC for?
A HELOC allows you to tap into your home’s equity to get cash to help cover expenses or get extra funds. Here are some things you can pay for with a HELOC:
- A home remodel or renovation
- College tuition
- Consolidate high-interest debt
- Pay off credit card debt
What is a HELOC statement?
A HELOC statement will include your principal, end of draw date, maturity date, payment due date and address. It’s important to pay attention to the end of draw date as your interest rate may go up after that date and at that time you will need to pay interest plus principal.
What is a HELOC draw period?
The HELOC draw period is typically the first 5-10 years where you can take out the money you need to borrow. During this time you only pay back the interest on what you borrow.
Can I pay off a HELOC early?
Yes, you are able to pay off a HELOC early. Like any credit line, you are able to take out money when you need it or you don’t have to take out any money at all. If you pay off what you borrow early, you can either close the credit line or keep it open until you need additional money.
How much can you borrow on a HELOC?
The amount you can borrow depends on how much equity you have in your home. That number is based on the value of your home and how much you have left on your mortgage. Lenders vary on their guidelines and will generally look at your loan-to-value (LTV) ratio to determine how much you can borrow.
Should I use a HELOC to pay off credit cards?
It can be risky to use a HELOC to pay off credit cards. A HELOC uses your home as collateral, so if you default, you are putting your home at risk. However, if you get a lower interest rate and can pay back the HELOC on time, you may save money by using the loan to pay off credit card debt.
What credit score do you need to get a HELOC?
Requirements vary by lender for taking out a loan using your home equity, but generally you would need at least a score of 620 or higher to be eligible for a HELOC. You also need to have enough equity in your home and lenders will need to look at your debt-to-income ratio to determine if you are able to pay back the loan.
What is better: HELOC or a Home Equity Loan?
Both are similar in that you borrow against your home equity to get cash to pay for expenses. The difference is that with a home equity loan you get the money in a lump sum with a fixed interest rate. A HELOC is a credit line and you borrow what you need. Interest rates are variable, so they will increase during the life of the loan. Learn more about the differences between a HELOC, home equity loan and a cash out refinance.
Are there closing costs with a HELOC?
Closing costs vary by lender and may include an application fee, appraisal, title search and, attorney fees.
Can I increase my HELOC limit?
You may be able to increase your line of credit on your HELOC depending on your home’s value and your financial situation.
Can I use a HELOC to pay off my mortgage?
Yes, you can use a HELOC to pay off your mortgage, but you should have more equity than the balance of the loan. If your HELOC has a better interest rate than your mortgage and you can pay if off within the draw period before rates go up, then it could be a good option.
Can I use a HELOC for a down payment on an investment property?
Yes, you can use a HELOC for a down payment on an investment property. Just note that lenders look at debt-to-income ratio as well as credit score. Do the math to determine if you’ll be able to meet the monthly payment obligation of a HELOC with the investment income. Otherwise, you may be putting your primary home in jeopardy if you can’t repay.
Which is better a HELOC or cash out refinance?
It depends on your individual financial situation.
A HELOC is a credit line that allows you to access cash for a period of time. A cash out refinance allows you to refinance your mortgage for more than you owe and gives you a lump sum of cash upon closing. The choice you make depends on your needs. Unlike a HELOC, a cash out refinance can provide you the stability of a fixed principal and interest payment. Learn more about the differences between a HELOC, cash out refinance and home equity loan.
Can I get a HELOC with bad credit?
If you have bad credit, you may still be able to qualify for a HELOC depending on your lender’s requirements. Your credit score may impact the interest rate you receive.
Are HELOC rates fixed?
Generally, HELOCs have variable rates, but some lending institutions may offer a hybrid HELOC, which means you can take some or all of the money you borrow and convert it to a fixed loan. This can usually be done before closing or during the draw period. The longer the term, the more you pay in interest, but some lenders may limit the term you can take out. Check with your lender to find out if they offer a hybrid HELOC and their flexibility on the loan term.
How long do you have to pay off a HELOC?
Generally the draw period of a HELOC is between 5-10 years and repayment 10-20 years after that. You can always pay off the loan ahead of time, which will reduce the interest you pay throughout the life of the loan.