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Home Equity Line of Credit (HELOC)

Owning your own home is an important investment. With this investment comes various financial options. You can access what you’ve paid into your home and its value to make other current expenses easier to manage.

With a Home Equity Line of Credit, you can make the most of the equity you’ve paid into your home by borrowing against it to finance other expenses or pay down high-interest debt. It provides flexible, low-interest and affordable financing available as a revolving line of credit.

What is a Home Equity Line of Credit?

You have a handful of options when choosing financing, whether you’re looking to cover expenses, pay down high-interest debt, pay student loans, or other needs.

This could include getting a personal loan or credit card but these might not provide the most affordable terms. They often have high interest rates because they don’t allow you to offer any collateral to secure the loan. 

Get your HELOC rate now

With a Home Equity Line of Credit (HELOC), you can access financing for various needs by borrowing against the equity you’ve already paid into your home. It allows you to benefit from the investment you’ve made in your home with low-interest financing.

Depending on what you owe on your current mortgage, you can borrow up to 85% of your home’s value. Approvals for HELOCs are simpler than mortgages and there are typically no application fees or closing costs.

Once approved for a HELOC, you can access a large sum of money right away or withdraw smaller amounts as needed. Within this “draw period,” you can also pay your outstanding balance on an ongoing basis, which replenishes the money available to borrow, much like a credit card. Otherwise, you can make minimum monthly payments on the amount you owe during this time.

When your draw period ends, the length of which may vary depending on your terms, you begin the repayment period where you’ll pay the remaining balance with interest like a typical loan.

These features make HELOCs a popular option for homeowners who need to finance other expenses or manage high-interest debt with low-interest and flexible financing.

How to Get a Home Equity Line of Credit

To learn whether a HELOC is the best option for reaching your financial goals, connect with AAA Banking. To get you started, we’ve outlined the steps and documentation needed to help you understand what it takes to get approved for a HELOC.

The Financing Process

By sharing basic information about your current finances and interest in a HELOC, we’ll work with you to pull your credit report and calculate how much you can potentially borrow, depending on the equity in your home, the home’s value, and whether you currently have a mortgage.

We’ll also discuss the terms you qualify for and your options, as well as request various documentation for the underwriting process to make sure the HELOC begins on a solid foundation.

We’re with you through each step, leading to closing where you can begin to make the most of your home’s equity with your new line of credit.

Get qualified for a Home Equity Line of Credit

HELOC Requirements to Meet

These are the common requirements often needed to qualify for a HELOC. If you have questions about these requirements, we’re here to help.

  • Home equity is the difference between how much you’ve paid on your mortgage and your home’s market value. To qualify for a HELOC, you typically need to have at least 15-20% equity in your home.
  • We’ll use the amount of equity you have to calculate your Loan-to-Value (LTV) ratio to see if you qualify. With high equity you may be able to borrow up to 90% of your home’s value (85% on a condo or townhouse), depending on how much you currently owe on your home.
  • A credit score of 680 or higher qualifies. 
  • Through underwriting evaluation, you’ll need documentation of your Debt-to-Income (DTI) ratio, which shows how much of your monthly income goes to paying your current debts. You will need a maximum DTI of 45%. 
  • You may also need to verify employment history and that you receive consistent ongoing income.
  • Showing proof of reliable payment history on your current or past mortgage is also helpful in qualifying for a HELOC.

Home Equity Line of Credit FAQs

Making the most of your home and your financial goals makes a big impact on your life. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.

How can I use the money from a Home Equity Line of Credit?

In most cases, a HELOC is flexible and can be used for any expenses you choose.

It’s common to get a HELOC to cover expenses such as student loans, home renovations, emergency expenses like medical bills, or other reasons you may get a personal loan such as buying a car.

Because its interest rates are lower, a HELOC is also great for consolidating and paying down high-interest debt like credit cards.

You can borrow only what you require, which is helpful if you’re initially uncertain about how much your total expense will be and how much financing you will need. This prevents you from borrowing and paying interest on more than you need if, for example, the expense you’re using it to cover is lower than anticipated.

How do I access the funds from a HELOC and when do I need to pay them back?

Once approved, in many cases, you’ll have access to your HELOC funds through checks or a card from the lender that is tied to your HELOC account.

When you apply for a HELOC, we’ll discuss in further detail the terms for the draw or borrowing period, as well as the length of the repayment period. 

The draw period, which is 10 years, is the time frame in which you can draw money out of the account. Payments made during this time are interest only. 

After that time period ends, you’ll begin the repayment period, which is 15 years. This is where you can no longer withdraw funds and will instead begin paying down the remaining balance with interest.

How do HELOC interest rates compare to other financing like personal loans or credit?

HELOC interest rates are lower than other personal loans or credit cards. This is possible because you’re borrowing against an asset (your home) that helps to secure the loan. 

Your home is valuable collateral that the lender can rely on if you can’t repay your HELOC. This makes lending the money less of a risk for the lender so that you can have easier access to financing.

It’s also something to consider if you have concerns about repaying a HELOC because, if you can’t make payments, your home is on the line for the balance you owe.

What type of income is needed to qualify for a HELOC?

You’ll most likely need proof of reliable ongoing income to be approved for a HELOC, because consistent income shows that you can make monthly payments to pay back your loan. This might include providing W-2s and pay stubs.

If your income is too low to get approved, a co-signer may help to meet Debt-to-Income requirements.
If you don’t have consistent income from a traditional job, it may be more challenging to get approved for a HELOC but there are other sources of income that can be considered. This might include income from investments like real estate or retirement accounts, self-employment, a pension, a trust fund, social security, child support, long-term disability, or VA benefits.

We’ll help you determine if you have the necessary factors and documentation in place to get approved for a HELOC.

*Consult your tax advisor for further information regarding the deductibility of interest and charges. 

Annual Percentage Rate (APR). Rates and terms effective as of 08/30/2022.  Advertised rates and terms are subject to change without notice.  Additional terms and restrictions apply.  Subject to borrower qualifications.  Offer is based on maximum combined loan to value of 90%. This is a variable interest rate product. Variable rates are calculated by using the most recent Prime rate published in the “Money Rates” section of The Wall Street Journal. The current Prime rate 5.50%. After the initial fixed-rate period, the minimum APR that will be imposed can range from 3.00% to the maximum of 18%. Upon approval, your home equity line of credit amount may vary based on your specific situation. You must also pay certain fees to third parties to open a line of credit. To open a typical line of credit of $75,000, borrower-closing costs are estimated to range from $350 – $2,500 depending on the geographic location of the property. Property insurance is required and flood insurance may be required. During the draw period, your minimum monthly payment will be the interest on your current balance (any funds you have drawn from your HELOC). During your repayment period, your payments will include the principal amount plus interest. Home equity line of credit has a 10-year draw period and a 15-year repayment period. Home equity lines of credit must be secured by owner-occupied primary residences and second homes only.  Minimum draw amount after closing is $100. 

Your minimum payment can vary during both the draw period and the repayment period. During the draw period, your minimum monthly payment will be the interest on your current balance (any funds you have drawn from your HELOC). For example, if you draw $50,000 and your interest rate is 6.00%, then your minimum payment at this rate during the draw period will be $250.00 a month. When the draw period ends, your repayment period begins. During the repayment period your payment will include the principal amount plus interest in an amortized schedule. For example, if your balance due is $50,000 and your interest rate is 6.00% then your minimum payment at this rate during the repayment period will be $421.93 a month. During the application process we will provide important disclosures about this product that you are encouraged to carefully review.