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You are here: Home / Finance / What Is a HELOC? Your Ultimate Guide to Home Equity Loans
What Is a HELOC? Your Ultimate Guide to Home Equity Loans

What Is a HELOC? Your Ultimate Guide to Home Equity Loans

September 16, 2022 By Cade Hildreth Leave a Comment

Home equity can be a major benefit of buying a home. You can find many amazing places to rent, but if you’re the tenant and not the owner, then you won’t benefit when the property value goes up.

The difference between your current home value and the amount of your mortgage loan is called equity. The equity in your home can be cash in your pocket with a home equity line of credit (HELOC).

What is a HELOC? Check out this guide to understanding when and how to use a home equity line of credit.

What is a HELOC?

When the value of your home goes up this is called appreciation. When you make monthly mortgage payments, that simultaneously reduces the amount you owe the bank. Appreciating home values give homeowners access to loan products beyond their current mortgage.

One of the more common loan products is a home equity line of credit or HELOC. Lenders are willing to offer you money with the understanding that you have an asset you can sell in case you can’t repay your loan.

For example, if you lose your job, selling a home with equity should get you enough money to pay off your mortgage and any lenders who allow you to borrow against the equity.

Equity loans are a type of secured credit making them less of a risk for lenders. Secured loans are far easier to get than unsecured loans for people with average financial history.

The Cost of Equity Loans

The decision to pursue an equity loan like a HELOC is a major one. It’s probably a bigger deal in some markets than other because of fluctuating home values.

Having your house on the line as collateral for debt means you’re opening the door for potential liens. Let’s say the housing prices in your market drops and you need to sell right away.

You’ll be on the hook for the entire balance of your mortgage, plus the additional loan even if the equity is no longer in the home. This means the lender can put a lien on your home.

Liens give lenders rights to your home which makes it harder to sell. You’ll be forced to repay debt faster or risk a standstill with the lender.

The HELOC Process

Just because secured loans are easier to get doesn’t mean there’s no vetting process. You’ll still need a solid financial history in order to qualify.

The amount you qualify for and terms are what determine the fees you pay. For example, with amazing credit and a steady income, the cost to borrow money is cheaper.

Low-interest rates mean you’ll pay lower payments than someone with an average credit score. Prepare for the application process as you would a first mortgage loan.

Overall, the underwriting is usually less intense than when you first applied for a home loan but can be just as long. The good part about the process is that you aren’t waiting on pins and needles for approval as you did with your first mortgage.

You’re already in your home so you can rest easy waiting for the approval process to be completed.

How to Get Approved for a HELOC

Build your credit score while shopping around for a HELOC with good rates. The underwriting team with your lender will want to see an accurate appraisal and good credit history.

Don’t expect a loan of 100 percent of the equity in your home. Most banks cap their loan to value ratio so they’re not a risk.

Overestimating the value of a home is a lose-lose for everyone involved because fluctuating markets happen unexpectedly.

Lenders typically offer no more than 80 percent of the estimated equity in a home in the form of a HELOC.

This percentage isn’t universal so be sure to ask your lender for its combined loan to value ratio (CLTV).

Understanding HELOCs

Unlike a conventional loan, HELOCs are a revolving source of cash.

They operate similarly to a credit card since you can spend money, repay it, and have access to the full amount again.

This is a major perk for homeowners needing an ongoing source of cash. There are a variety of ways a HELOC can be accessed.

Some banks provide an online transfer option while others allow you to write checks from the line of credit. The money belongs to the bank so it’ll remain in a protected account until you need to make withdrawals.

Repayment schedules are generally monthly unless you work out an alternate deal with your bank. There are little closing costs when it comes to a HELOC. Some lenders don’t charge fees at all.

A major downside of HELOCs is variable interest rates. With variable interest rates, you don’t know exactly what your payment amount will be each month.

These fluctuating payments can quickly become a financial burden if you’re carrying a high balance. A select number of lenders offer fixed rates but these are less common.

Should I Get a HELOC?

There are pros and cons to opening a HELOC. One pro is that your access to funds remains flexible.

You won’t have to worry that once you spend the money you can never get access to funds again. Next, the funds you don’t use won’t accrue interest.

This means you’re only paying interest on the money you use.

If you get a HELOC for $20,000 but only use $5,000 of the available balance, you pay interest only on the $5,000.

HELOCs are a great source of emergency funds if you ever need it. Keep in mind that some banks might complicate the situation by requiring that you make a minimum withdrawal.

If you’re not HELOC savvy, it’s best to avoid these types of HELOCs.

Can I Afford a HELOC?

An important thing to consider when exploring ‘what is a HELOC’ is whether it’s affordable. You’ll be issued a draw period for the line of credit once it’s approved. The draw period is usually around 10 years.

The draw period is the amount of time you have access to the line of credit. You’ll only make interest-only payments during this time. An interest-only payment is a payment made to cover the interest that accrues on the loan.

Interest-only payments don’t reduce the overall balance of what you owe which is called the principal.

You can pay a little extra towards the principal balance you owe, but won’t owe the entire balance until the end of the draw period. This is tricky if you don’t have self control financially.

It can mean having access to a large lump sum of money on which you don’t owe much initially. Because you’re making payments only toward the interest, you may have a false sense of confidence about how much you can afford.

For example, with a credit score of 780 or above, you’ll have no problem qualifying for today’s lowest interest rate of 2.8 percent. Your payments on a $50,000 line of credit would be around $116 per month during your draw period.

Once the draw period ends, your payments jump to $478 per month because the payment now includes payments toward both the interest and principal balance.

But you’ll get an extended 20 year repayment period for the entire balance you owe after the draw period is over. At this time, the principal and interest are due making your payments larger than the interest-only period. Once the draw period is over, you can’t withdraw any more of the available funds.

Do you have any other questions about what a HELOC is? If so, ask them in comments below and let’s discuss.

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“As an LGBTQ+ entrepreneur, real estate investor, former USA Rugby Player, and fitness fanatic, I’ll teach you what your parents and teachers should’ve taught you, but didn’t know themselves.” -Cade Hildreth

Want to know what I learned making my first few million? Subscribe here.

Or, listen to Cade’s articles on the go as a Podcast.

Because it’s the New Year, let’s talk about ch Because it’s the New Year, let’s talk about change...

For a long time, I’ve thought about top surgery. I remember when I was 6 or 7 years old when I wanted to run around outside on a hot, sunny day with my shirt off…and I first saw my parents… hesitate. Ughh. 

It wasn’t their fault but I still remember that heart wrenching feeling. To their credit, they ultimately said, “Ok, go do it!” While I did “do it”, I remember the feeling of shame that crept in.

Over the years, being in affirming sporting/rugby circles helped suppress the urge to get top surgery, but it never quite “stayed down.”

So last summer I got keyhole #topsurgery. I’ll talk about recovery in another post because it was definitely weird to not strength train for months.

But in THIS post, I want to share two things:

1. I am SO grateful to my wife Erin for being the supportive and growth oriented partner that she is. 🥰🙏❤️ 

She is now following her call to get a divinity degree and she’s already working in ministry as a Pastor in Training at an incredible, inclusive Presbyterian church here in Virginia. I am grateful to her for supporting me as I become more and more of who I am—and I’m enjoying watching her do the same! Love you, babe!

2. Second, I’m grateful to get to share who I am with my family. This summer we took a trip to Madden’s resort in MN to celebrate my parent’s 50th wedding anniversary. (It was actually their 52nd, because we had to postpone it twice due to Covid.)

I was nervous to be in the pools and lakes around them, but I could feel it was my only choice because I knew I wanted them to “know me”. And, how could that happen if I “hid me”?

Ultimately, I have to tell you…it was freeing to be me, as I am, who I am. 

I had the BEST time splashing around and biking and goofing around with my wife, niece, nephew, & sister. 🌊🏖🐟

So, I suppose, this is a gratitude post to thank those who have supported me over the years as I become more and more of who I am. 

Top of that list is my wife, Erin, but there are countless others. ❤️

If you’re reading this, thank YOU for being one of those people in my life too. I am deeply grateful. 🥹
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#lgbtqfamily #nonbinary
How to set a boundary? 🤔 . . . . #lgbtqia #lgb How to set a boundary? 🤔 
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#lgbtqia #lgbtqcommunity #emotionalhealth
What do you do if you’re telling a past story ab What do you do if you’re telling a past story about someone who has transitioned? 🤔 Share a 💯 if you agree ➡️🏳️‍⚧️🏳️‍🌈
7 things I got clarity on in 2022: 1. Good and b 7 things I got clarity on in 2022: 

1. Good and bad are labels. All things are experiences. 

2. Maturity is taking full responsibility for oneself. 

3. Having a loving, conscious relationship with myself is a core value. 

4. Emotions do not mean that anything has to be done. 

5. When I am in congruence with what I want, I have it. 

6. I have permission from myself to stop doing anything that doesn’t lead to my peace and empowerment. 

7. Stepping toward emotions and being able to feel them is a superpower. It determines the quality of my life. 

(Are there any above that you’d like me to further explain?)
 
Most importantly, which # above resonates with you? ⬆️

Happy New Year, y’all! 🎊🥳
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#lgbtqcommunity #lgbtqiaplus #lgbtsupport #nonbinary #trans #selfgrowth
Interview with Jenny Nguyen, Founder of the Sports Interview with Jenny Nguyen, Founder of the Sports Bra—The World's 1st Bar to Only Play Women's Sports - shorturl.at/doGHZ

I'm excited to introduce you to today's #podcast guest, Jenny Nguyen, who is a professional chef, elite athlete, and entrepreneur.

I invited Jenny onto the podcast because she has done something extraordinary that is long overdue: She has opened up a sports bar that exclusively plays women's sports!

Despite extensive research, Jenny hasn't found another sports bar worldwide that ONLY plays women’s sports.

Given that it's nearly 2023, this is mind-blowing. As a lifelong athlete, I find her vision compelling and inspiring.

Aptly called the "The Sports Bra", the venue is putting Jenny's culinary skills on display alongside women's sports worldwide.

The Sports Bar has taken its mission a even further by partnering with and elevating other local, women-owned businesses.

Specifically, it:

1. Sources its grass-fed beef from @CarmanRanch, an ranch run by Cory Carman, a third gen rancher out of Wallowa, Oregon).

2. Sources its alcohol from Freeland Spirits, an all-women owned and operated distillery out of NW Portland.

3. Has furniture built by @girlsbuild_org, a non-profit organization headed by @ktmhughes in Portland, OR, that teaches carpentry and construction skills to young girls as a path to empowerment.

Since opening the Sports Bra this April, people have come from ALL over the U.S. and the world to experience it—including many professional female athletes.

To learn more about Jenny as she makes history, features women's sports, and elevates women-run businesses, listen to the episode here:

shorturl.at/doGHZ

Or, you can check out the Sports Bra at:

@thesportsbrapdx
TheSportsBraPDX.com/

Have you heard of the Sports Bra or been out to experience it in person?

#lgbtqiaplus #womenownedbusiness #lgbgtqia #lgbtqcommunity #womenssports #womeninsport
Over this recent holiday stretch, we… - enjoye Over this recent holiday stretch, we… 

- enjoyed some quiet time at home
- got a sauna delivered (but not yet installed)
- decorated for the holidays
- baked a bunch
- visited our favorite farm
- did some sight seeing
- and perhaps, most importantly, survived the cold snap along with our feather friends (who lived in the garage for a few days so we could heat them with a space heater) 🥶🐔

How have the holidays treated you…and did you get hit by the winter storms? ❤️🎁☃️❄️
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