Learn About…
HELOC (Home Equity Line of Credit)
What is a HELOC?
A HELOC is a type of second mortgage that allows homeowners to borrow money against the equity they have in their home and receive that money as a line of credit. Borrowers can use HELOC funds for multiple purposes, including home improvements, education, and the consolidation of credit card debt.
Qualification Requirements for HELOCs
These requirements may vary depending on circumstance, but you typically need:
What Do You Need For A HELOC?
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15 - 20% Home Equity
Reliable Income
Responsible Payment History
Low DTI
- Reliable income: Many lenders will need proof of income to confirm you’ll be able to pay off your loan payments.
- Good credit: A credit score above the mid-600s will likely approve you for a loan. A credit score above 700 is considered ideal.
- Qualifying amount of equity in your home: You should have at least 15 – 20% home equity.
- Responsible payment history: Lenders may evaluate your previous payment history to make sure you haven’t made any late payments in the past.
- A low debt-to-income (DTI): The lower your DTI, the better. Discuss with your lender what their qualifying DTI ratios are to potentially receive a loan.
Pros and Cons of HELOC Loans
HELOCs can be a useful financial tool, but be sure to ask your loan officer if this is the best option for you. Here are some important pros and cons your loan officer may go over with you:
Pros
- Be ready for the upfront costs. Before receiving a HELOC, you may be required to pay an application fee, for a home appraisal, title search, and attorney fees.
- Your home will be used as collateral. Any time you take on debt, especially one that is tied to your home, there are risks. If you find yourself unable to make payments on your HELOC, you may end up losing your home, since it acts as collateral for the loan.
- Your payments and rates may increase. You also must watch out for potential rate or payment increases based on market fluctuation. If your rate goes up, or your draw period ends and you must go from making interest-only payments to full payments, your finances could suffer a shock from the increase. Make sure your finances can handle this.
- This may not be the practical option. You should also be careful about using a HELOC to pay for everyday expenses. Though it might start to feel like a regular credit card, you’re trading valuable equity for the money you borrow from your HELOC. In general, it’s best to only use your HELOC for things that will help you financially. Ask your loan officer if this would be a good option for you.
Cons
- You can consolidate debt at a low-interest rate. A HELOC can be a good choice if it allows you to consolidate your debts at a lower interest rate.
- The money may be used for anything. HELOCs are also flexible and can be used for anything you need the cash for, including education-related costs.
- Access to a large sum of cash. A second mortgage of any kind maybe your best option for borrowing a large sum of cash, which can be useful for costly home improvement projects.
- Borrow as much as you need. Along with their flexibility, HELOCs allow you to borrow as much money as you require. There is no percent cap. This is favorable if you aren’t sure how much money your project or investment will cost in the long run. So if a project ends up being under budget, you won’t have to worry about paying more than necessary in interest.
- It can be tax-deductible. Speaking of home improvement, the interest you pay on a HELOC may be tax-deductible if you use the funds to make improvements to your home. Ask your loan officer about this.
Pros and Cons of HELOC Loans
HELOCs can be a useful financial tool, but be sure to ask your loan officer if this is the best option for you. Here are some important pros and cons your loan officer may go over with you:
What Can You Use Equity For?
Home Renovations
If you plan to use the money to improve or increase your home value, it makes sense to tap into your home’s existing equity using a HELOC. This includes curb appeal and landscaping!
Education Expenses
Another option is using your home’s equity to pay for your or your child’s education. Student loans are no fun, and why not let your home pay for it!
Retirement Plans
Some find this as a great tool to use for retirement plans! Ask your loan officer more about this option.
Large Investments
Wants to start or continue to invest? Use the equity from a HELOC to use for a down payment on a second home, investment property, or even a new car! Ask your loan officer about this option.
Rosa Castillo
Senior Loan Officer
Ray Ochoa
Senior Loan Officer
Bill Craft
Sales Manager
NMLS 1621885
State Lic: AZ LO-0942496, CA-DBO01621885, MLO-54015VA
PHONE: (928) 366-1639
PHONE: (928) 247-9089
