Are you a homeowner who is currently interested in securing an extra source of income? There are some loan options available that can help a borrower access their home equity in exchange for credit or cash. One great option that lets you tap into your home equity is a home equity line of credit, or HELOC. If you are located near Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, and interested in learning more about accessing your home equity to help boost your income, Foundation Mortgage can help.
HELOC: Essential Information
The total amount that your home is worth minus the amount that you still owe on your home is known as your home equity. A home equity line of credit is categorized as a second mortgage that allows a current homeowner to borrow money from the equity that has built up in their home, and use that funding as a line of credit that is required to be paid back. Each time you make a monthly mortgage payment, the amount of your home that you own grows. After you have built up a sufficient amount of home equity, you have the opportunity to use that equity as an investment and an income source. Eligibility requirements for a home equity line of credit vary for each borrower’s situation, however, typical qualifications include a debt-to-income ratio, (DTI), of 43 percent, a 620 or higher credit score, and most lenders require at least an amount of 15 to 20 percent of home equity built up.
How A HELOC Works
A Home Equity Line of Credit (HELOC) is a type of revolving credit that allows homeowners to borrow against the equity they have built up in their homes. Here’s how a HELOC works:
Equity Calculation: The amount you can borrow through a HELOC depends on the equity you have in your home. Equity is the difference between the current market value of your home and the amount you owe on your mortgage. For example, if your home is valued at $300,000 and you still owe $200,000 on your mortgage, you have $100,000 in equity.
Application and Approval: To obtain a HELOC, you need to apply with a lender, such as a bank or credit union. The lender will assess your creditworthiness, income, and the value of your home to determine the maximum amount you can borrow. If approved, the lender will set a credit limit for your HELOC.
Draw Period: Once approved, you enter the “draw period.” This is usually a period of 5 to 10 years during which you can access funds from your HELOC as needed, up to the approved credit limit. You can withdraw funds using checks, a credit card, or electronic transfers.
Variable Interest Rate: HELOCs typically come with variable interest rates, which means the rate can change over time based on fluctuations in a benchmark interest rate, such as the prime rate. Your monthly payments will vary depending on the interest rate and the outstanding balance.
Repayment: During the draw period, you have the flexibility to make interest-only payments on the amount you’ve borrowed or make payments that include both principal and interest. As you repay the principal, those funds become available for you to borrow again. It’s important to note that during the draw period, your payments may be relatively low, but you’re still accruing debt.
Repayment Period: After the draw period ends, you enter the “repayment period,” which is usually 10 to 20 years. During this time, you can no longer borrow from the HELOC, and you must start repaying both the principal and interest. Your monthly payments will likely increase since you’re paying off the remaining balance.
Variable Interest Rate Risks: The variable interest rate nature of HELOCs can lead to changes in your monthly payments due to interest rate fluctuations. If interest rates rise, your payments could increase, potentially making it harder to manage your finances.
Risk to Your Home: A HELOC is secured by your home, which means if you fail to make payments, the lender could initiate foreclosure proceedings to recover the outstanding debt.
Fees and Costs: HELOCs may come with various fees, such as application fees, annual fees, and closing costs. It’s important to carefully review the terms and costs associated with the HELOC before committing.
Financial Flexibility: HELOCs can provide financial flexibility for homeowners who need access to funds for things like home improvements, education expenses, debt consolidation, or other major expenses. However, it’s crucial to use the funds responsibly and manage your payments diligently to avoid financial difficulties.
Remember that HELOC terms can vary based on the lender and the specific terms of the loan. Before considering a HELOC, it’s recommended to thoroughly research different lenders, understand the terms, and assess your ability to manage the payments over the life of the loan.
If you are a homeowner interested in ways to increase your income with a HELOC in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, contact Foundation Mortgage today for a consultation.
