What Is a Home Equity Line of Credit?

What Is a Home Equity Line of Credit?

Are you a current homeowner looking for a supplemental form of income? There are loan options that exist that can allow you to access the equity that has built up in your home in exchange for credit or cash. One great type of option that lets borrowers tap into home equity is known as a home equity line of credit, or HELOC. If you own a home in and around the areas of Knoxville, Maryville, Lenoir City, or Oak Ridge, Tennessee, and want to learn more about your mortgage options, Foundation is here to help. Continue reading to learn if a HELOC is right for you.

Home Equity Line of Credit: Essential Information

A HELOC can be described as a second mortgage that allows a current homeowner to borrow against the equity of their home and use that money as a line of credit that eventually is paid back. The amount of home equity you have can be determined by subtracting the amount that you still owe on a loan from the total amount that your home is worth. Each time a borrower makes a mortgage payment, the amount of home that they own grows, making it possible to utilize that investment as a source of income after an adequate amount of equity has built up.

How Does HELOC Work?

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A Home Equity Line of Credit (HELOC) is a type of revolving credit that allows homeowners to borrow against the equity they have built in their property. It’s similar to a credit card in that it provides a credit limit that you can borrow from, repay, and borrow from again. HELOCs are often used for home improvements, debt consolidation, education expenses, and other large expenses. Here’s how a HELOC generally works:

Equity Assessment: To qualify for a HELOC, you need to have equity in your home. Equity is the difference between the current market value of your home and the outstanding balance on your mortgage.

Application and Approval: Apply for a HELOC through a bank, credit union, or other financial institution. The lender will evaluate your credit score, income, and the value of your home to determine your eligibility and credit limit.

Credit Limit: If approved, you’ll be given a credit limit, which is the maximum amount you can borrow using the HELOC. This limit is typically a percentage of your home’s appraised value, minus any outstanding mortgage balance.

Draw Period: The draw period is the timeframe during which you can access the funds from your HELOC. It’s usually several years long, often around 10 years. During this period, you can borrow funds up to your credit limit and repay them as needed.

Variable Interest Rate: Most HELOCs have variable interest rates that are tied to a benchmark, such as the prime rate. As the benchmark rate changes, your interest rate and monthly payments can fluctuate. Some lenders offer options to convert to a fixed rate for a portion of your balance.

Interest Payments: During the draw period, you’ll make monthly interest payments on the outstanding balance you’ve borrowed. These payments can vary based on the interest rate and the amount you’ve borrowed.

Repayment Period: After the draw period ends, you enter the repayment period, which is usually around 10 to 20 years. During this phase, you can no longer borrow from the HELOC, and you begin repaying both the principal and interest. Monthly payments during the repayment period are higher than during the draw period.

Accessing Funds: You can access funds from your HELOC by writing checks, using a debit card, or transferring funds online from the HELOC account to your regular bank account.

Revolving Credit: Just like a credit card, as you repay the borrowed amount, your available credit is replenished. This makes the HELOC a revolving line of credit that you can use again as needed during the draw period.

Use of Funds: You can use HELOC funds for various purposes, such as home improvements, education expenses, medical bills, debt consolidation, or any other large expenses. However, it’s important to use the funds responsibly and avoid overextending yourself financially.

Collateral: Your home serves as collateral for the HELOC. This means that if you’re unable to repay the loan, the lender could potentially foreclose on your property.

Fees: Be aware of potential fees associated with HELOCs, such as annual fees, origination fees, and closing costs. Make sure to understand these costs before signing up for a HELOC.

HELOCs offer flexibility and can be a useful financial tool, but it’s important to use them wisely and have a clear repayment plan. If you’re considering a HELOC, carefully review the terms, understand the potential risks, and consult with financial professionals to determine if it’s the right option for your needs and financial situation.

Home Equity Line of Credit Requirements

In order to qualify for a HELOC, there are certain qualifications that must be met, including:

  • A debt-to-income ratio of 43% or lower
  • A credit score of 620 or above
  • Most lenders will want you to have at least 15 to 20 percent equity in your home

If you are interested in learning more about a home equity line of credit in Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, contact Foundation Mortgage today for a consultation.


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