Is Opening a HELOC a Smart Financial Move?

When you need money, it can be tempting to turn to credit cards. Credit cards can provide access to money you can borrow and pay back over time. But if you own a house, you may have other options worth exploring.

A home equity line of credit, HELOC for short, allows you to tap into your home’s equity for extra money. HELOCs offer lower rates than personal loans and credit cards, and the fixed monthly payments can help you manage your budget. 

These types of loans can be an enticing and more cost-effective option for large expenses. Let’s look closer at these loans and when they can be a good option for Oklahoma homeowners.  

What is a HELOC?

New home shoppers in Oklahoma are up against lower housing inventories, rising living costs, and changing interest rates. The real estate market makes staying in your current house and remodeling an option worth exploring. But if you don’t have extra cash to pay for the renovations, a home equity line of credit may be the answer.

A HELOC is a revolving credit line that allows you to borrow against your home’s equity. You can use, pay down, and reuse the credit line during a set period as needed.

Requirements for these loans vary from lender to lender, but qualifying for a home equity line of credit is similar to when you obtained your mortgage. Lenders typically look for a credit score above the mid-600s, at least 15-20% equity in your home, a responsible payment history, a low debt-to-income history, and reliable income.  

How Does a HELOC Work? 

You won’t get a lump sum when you obtain your HELOC. Instead, you start what is called the “draw” phase, when your line of credit is open and available. During the draw period, you can borrow from your line of credit whenever you like, up to your credit limit. 

Your lender will set the time for your draw period, typically between five and 10 years. During this time, you’ll make minimum or interest-only payments. 

As you repay the balance, money above the interest amount replenishes the available credit. If you reach your credit limit during the draw period, you must repay part of the balance before you can borrow more.  

HELOC vs. a Home Equity Loan

If you’re exploring the best way to use the equity in your home, you may have heard you have multiple options: a home equity line of credit or a home equity loan. Both let you turn the value you’ve built in your home into cash, but they provide the funds differently. You will want to understand the differences if you’re deciding between them. 

HELOC and home equity loans differ in the following ways:

• Loan Disbursement. With a home equity loan, you get the entire loan amount at once and make monthly payments based on the amount. A home equity loan may be the best option if you’re looking to fund a single project that you know the cost for. With a HELOC, the maximum you can borrow may vary throughout the time you have the loan. If you prefer more flexible financing or aren’t sure how much funding you’ll need, a home equity line of credit may be a better fit for your project.
• Interest Rates. Home equity loans offer borrowers fixed interest rates, meaning you’ll keep the same interest rate until the loan is paid off. A HELOC comes with a variable interest rate, which fluctuates based on an underlying benchmark index. 
• Repayment Schedule. With a home equity loan, you’ll make fixed monthly payments during the entire term. A home equity line of credit requires partial payments during the draw period and larger monthly payments during repayment.

How Do I Repay a HELOC?

The repayment of HELOCs varies but is usually flexible. Many lenders collect interest-only payments during the draw period, with principal payments strictly optional. 

You’ll enter the repayment period once you reach the end of the draw period. During repayment, you can’t take out additional money. You will have to make both principal and interest payments until you’ve paid off what you borrowed. The length of the repayment period varies, but most lenders have a 20-year repayment time frame. 

At Focus Federal Credit Union, borrowers have a six-year draw period and a 14-year total payback period for HELOC loans.

How Can Borrowers Spend the Money?

HELOCs are a popular way to finance home renovations. From remodeling a kitchen to upgrading your bathroom, you can leverage the equity in your home while increasing its value. Plus, if you use the funds for home improvement, you’ll have the added bonus of using it as a tax deduction. 

While home improvement projects are a popular use for these loans, you’re free to spend the money however you please. 

Other common uses include:

• Consolidate Debt. These loans can help you consolidate credit card and other debt into a single, lower-interest loan. You’ll benefit from a streamlined payment and lower interest rates.  
• Pay Medical Bills. Medical expenses are unexpected, and they can be expensive. When an unexpected medical bill comes up, you can use a home equity line of credit instead of relying on high-interest credit cards.
• Higher Education. You could use funds for tuition, textbooks, room and board, and other education-related costs. A home equity line of credit can help cover funding gaps after applying for financial and federal aid. 

How to Decide if a HELOC is Right for You

Borrowing from your home’s equity isn’t a decision to take lightly since failing to make payments puts your home at risk. If you’re thinking about borrowing for a major purchase that’s not a necessity, consider saving up all or a portion of the cost to limit the amount of new debt you’re taking on.

A home equity line of credit can offer financial flexibility and access to funds for various purposes, whether you’re renovating a bathroom, building an addition to your home, or consolidating high-interest debt. But whatever you plan to use the loan for, it’s vital to make an informed decision by considering your financial situation and weighing the associated costs and risks. 

Is Everyone Eligible?

Like every loan and line of credit, HELOCs have eligibility requirements, which help lenders determine the applicant’s financial wellness and responsibility. Most notably, the borrower must have minimal equity in the home. 

Lender requirements vary, but they are generally looking for a debt-to-income ratio of less than 40%, a credit score of 600 or higher, and a home assessment of a minimum of 15% more than what is owed.

How Much Can I Borrow?

HELOC amounts vary along with three criteria: 

1. The value of your home
2. The percentage of that value the lender allows you to borrow against
3. The outstanding amount on an existing mortgage.

Let’s say you have a $300,000 home with a mortgage balance of $175,000. Your lender allows you to borrow against 85% of your home’s value. Multiply your home’s value by 85%, or 0.85. This will give you $255,000. Subtract the amount you still owe on your mortgage of $175,000, and you’ll have the maximum amount you can borrow using a home equity line of credit, which is $80,000.

What Are the Disadvantages of a HELOC?

The loan is secured by your home’s equity, which places your home at risk of foreclosure if you don’t repay the loan. Before opening a HELOC, it’s a good idea to run the numbers to understand your monthly payments and whether you can easily afford to meet them.

Many lenders require the full payment of the loan after the draw period. This can prove to be challenging for many borrowers. 

If you plan to stay in your home for a short time, a home equity line of credit may not be the right choice for you because when you sell your home, you’ll need to pay off the entire balance. You may also need to pay a cancellation fee to the lender.

FAQs

Still trying to decide if a home equity line of credit is your best option? Here are some frequently asked questions to consider.

Can I Afford It?

To determine whether it fits your finances, thoroughly examine your current money situation. Calculate your existing debts, income, and monthly expenses to decide whether you can afford the additional debt. 

Remember that if you miss payments or overextend yourself, you could put your home at risk of foreclosure.

As part of your overall affordability assessment, calculate the equity in your home. Start by identifying your property’s market value. Online home price estimators are an easy way to gauge your home’s worth. Next, you’ll need the outstanding balance on your mortgage, which can be found on your most recent statement. Calculating equity requires basic subtraction once you have your home’s value and mortgage balance. 

Let’s say your home’s current value is $250,000, and you have a $180,000 balance remaining on your mortgage. Subtract the $180,000 outstanding balance from the $250,000 value. Your calculation would look like this:

$250,000 – $180,000 = $70,000 home equity

Lenders usually let you borrow up to 85% of your home’s equity.

What Are the Fees and Costs?

One downside to HELOCs is that they can come with various costs, including application fees, closing costs, annual fees, and potential early termination fees. A clear picture of the fees and expenses will allow you to be better prepared to understand the actual price tag. 

What Are the Current Interest Rates?

The interest rate helps determine how expensive it is to borrow against your equity, so it’s essential to know the current interest rates and understand the type of rates you’re being offered. 

HELOCs can come with either fixed or variable interest rates. With a variable interest rate, your payments could increase over time due to changes in the market. And while a fixed interest rate will keep your payment consistent, you could be losing money if interest rates drop in the future. Rates vary based on the lender, credit score, and other factors, so research before committing. 

Can I Get a HELOC if I Have Bad Credit?

Securing a home equity line of credit can be challenging, but possible, if your credit score isn’t strong. You can expect to pay higher lender fees and have less flexible borrowing options. 

How Quickly Will I Be Approved?

Every lender has different requirements and processes, so there is significant variation from lender to lender. Generally, expect the process to take 30-45 days from when the lender receives your application to approval. Your credit score and appraisal process influence the speed at which you get approved. Providing all the documents and information the lender requests is the best way to speed up the process.  

How Much Equity Do I Need?

You can borrow up to 85% of your home’s value, which includes any balance owed on an existing first mortgage loan. The maximum loan-to-value varies based on your creditworthiness.

Getting a HELOC from Focus Federal Credit Union

Are you looking to tap into your home’s equity with a HELOC? Contact us today to get started. Our favorable rates, generous eligibility requirements, and easy terms make a HELOC from FFCU an option worth considering for Oklahoma homeowners.