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Your Guide to Navigating HELOCs

Your Guide to Navigating HELOCs

A picture of a document that reads “HELOC,” near a calculator, journal, fountain pen, and a pile of cash

After purchasing your first home and beginning to pay off your mortgage, you may realize some necessary home improvements need to be made or that you want to consolidate some of your other debts. Either way, you will need to begin looking into options for loans and other lines of credit that will help with these impending costs. A HELOC is one option that can help you in both of these situations by offering an additional line of credit for home improvements and debt consolidation.

You may be wondering, “what is a HELOC?” Keep reading below to find out what a HELOC is, the benefits of a HELOC, how to know if you qualify for one, how to apply for a HELOC, and some things to consider as you begin applying for one. For more information, continue reading or contact your local Landmark branch to talk to one of our knowledgeable financial advisors.

What Is a HELOC?

A home equity line of credit, otherwise known as a HELOC, is a second mortgage you can take out on your home that gives you a revolving line of credit based on the value of your home. When you apply for a HELOC, you are borrowing against your home’s equity. To figure out what that number is, you must subtract how much you owe on your primary mortgage from the value of your home. You can even take a HELOC out if you own your home outright, making the HELOC your primary mortgage.

How Does a HELOC Work?

Two men going over documents in front of a laptop at a coffee table

HELOCs work similarly to credit cards in that you are allowed to borrow against your spending limit as often as needed and it comes with variable interest rates. You are generally given a maximum amount of credit that is based on the value of your home. Depending on the lender of the HELOC, there are a few different options for accessing the money from this account. You may be able to access your money online, with a bank card at an ATM, or by writing checks if the lender issues them.

There are two phases to your HELOC. The first phase is the draw period when you can take money from the account up to your approved limit. The second phase is the repayment period when you can’t take out more money and must finish paying off the money you’ve withdrawn. While you are in the repayment period, your monthly payments may rise a bit as you will now be making principal and interest payments. You may also have to pay a lump sum at the end of the loan to take care of any principal not paid during the repayment period.

What Are the Benefits of a HELOC?

In addition to providing you with the funds you require for home updates or general debt consolidation, HELOCs also come with many other benefits for those seeking a loan. First, HELOCs tend to have a lower interest rate and initial cost, which is great for ongoing projects or debt consolidation. You also only have to borrow what you need rather than taking out a lump sum of money that doesn’t actually get used fully. The less money you use each month, the less you will have to pay back later on.

You are also allowed some flexibility in terms of how you pay back your loan. A typical repayment period is 10 years, but your lender may offer different terms During this time, you will normally only have to make interest payments each month, however, you can also begin making principal payments to decrease the amount you are paying when you enter the repayment period. Adding a HELOC to your loan portfolio can potentially raise your credit score as well so long as you are making on-time payments.

How Do I Know if I Qualify for a HELOC?

In order to qualify for a HELOC, there are a few requirements that you’ll need to meet. First, your debt-to-income ratio can’t be too high, as lenders take this number into consideration.. In terms of HELOC credit score requirements, your score will need to be fairly high: mid 600s at a minimum. Finally, your home value must exceed the amount you owe on your mortgage by 20-25%. If you meet all these criteria, you can begin the process of applying for a HELOC.

How Do I Apply for a HELOC?
Animated image depicting a calculator, clipboard, bank card, and money

Once you have determined that you qualify for a HELOC, it is time to head over to your local bank branch to apply for it. Before arriving, you will need to make sure you have all the necessary paperwork and documents gathered and ready to have looked over. You will need income and employment documents, asset statements, monthly debt payments, and records of rent payments, divorce, bankruptcy, and foreclosure.

The next step is actually applying and getting approved for the loan. After you’ve been approved, you will receive some disclosure documents you will need to review thoroughly to ensure it fits your needs. Make sure to ask lots of questions in this stage so you understand what you are getting into prior to signing the documents. You will then enter the underwriting process, which can take a few weeks to complete. Finally, you are ready to sign the paperwork and begin taking advantage of your HELOC.

Things To Consider When Applying for a HELOC

There are some things you need to keep in mind when it comes to applying for and using your HELOC. First, you will need to be aware of the rate options available for your loan. There are two options to consider. The first is a variable interest rate, which is a rate that can change from month to month. The second option is a fixed interest rate, which allows you to convert a portion of your outstanding variable-rate balance to a fixed rate making your payments more predictable.

You will also want to be aware of how much credit you can actually get from the lender. The more equity you have in your home, the more you can borrow. Since you are offering your home up as collateral, it’s important to make sure you are able to handle the payments on-time to protect your house from foreclosure.

Apply for a HELOC With Landmark National Bank Today

If you believe a HELOC is the right option for you, find your local Landmark National Bank to apply for one today. We will help you every step of the way to ensure you understand what this type of loan entails and what your next steps are. Contact us today to learn more about applying for a HELOC from Landmark National Bank.