What is HELOC Loan?
This type of loan can enable you to use the equity you have built in your residential property as collateral to borrow cash.
Similar to primary loans used to purchase a residential property, experts at Replace Your University suggest that your home can be used as the security to protect your lender if you fail to pay the loan.
A HELOC loan is usually called a second mortgage since you have another payment to make in addition to your first mortgage.
How It Works
Most HELOC loans have two main phases. The first is called the draw period, usually ten years, during which you may access the available credit. HELOC loan contracts only need a small interest-only payment during this period. You can have the alternative of paying extra.
After this period ends, you may ask your creditor to extend it. Otherwise, the HELOC loan will enter another phase called repayment. You will no longer access more funds from here and regularly make principle-plus-interest payments until you clear the balance.
Many lenders have around twenty-year repayment periods after the ten-year draw period. You will need to pay all the cash you borrowed, including interest, at the contracted rate during this repayment period.
Requirements for HELOC depend on your credit score, debts, monthly income, home equity, and employment history. Your HELOC loan advisor may also tell you that qualification requirements vary by lenders. In general, they follow the below guidelines:
- DTI about 40% or less
- A credit score of 680+
- Interest rate
- Closing costs
The Amount You Can Borrow
The amount of HELOC loan you may borrow depends on the home’s value, how much you owe your mortgage lender, and what amount your lender can allow you to borrow.
Two calculations may give you a rough idea of how much you can borrow. This may include the current value of your x amount of money (in percentage) a lender allows you to take as a loan. This is equal to the maximum amount of loan you can borrow.
Another calculation includes the maximum amount of loan you can borrow – the remaining balance on your loan. This is equal to the amount you may borrow.
Among the greatest benefits of a HELOC loan is that you will have a low-interest rate compared to what you will get with credit cards or other kinds of loans. This means you will have a low cost to borrow the cash. In general, you need to pay for the closing costs. Other benefits may include the following;
- No upfront costs
- Large amount available
Although borrowing from your HELOC can be risky, if you may afford payments, an equity loan will allow you to borrow a large sum of cash at a low cost. If you are unsure whether to borrow a HELOC loan, speak to a reliable lender.