• Skip to main content
  • Skip to primary sidebar

Cade Hildreth

Everything You SHOULD'VE Been Taught in School.

MENUMENU
  • Blog
  • Finance
    • Cryptocurrency
    • Real Estate
    • Gold and Silver
    • Investing
    • Increasing Income
    • Financial Q&A
  • Real Estate
  • Health
    • Fitness
    • Nutrition
    • Confidence
  • LGBTQ+
  • Podcast
    • "What You Should've Been Taught"
    • Audio Feed of the Website
    • Ask a Podcast Question
  • About
    • Testimonials
    • About Cade
    • Rugby Bio
    • Instagram
    • Contact
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.

Want to stay in the loop? Join nearly two million other readers who are learning how to increase their income, invest in real estate, improve their health, and so much more.
Are we connected on social media? If not, let’s do it so I can share in your world too: Instagram | Twitter | Facebook | Pinterest | TikTok | LinkedIn | Podcast
4.9/5 - (18 votes)

Share this:

  • Click to share on Twitter (Opens in new window)
  • Click to share on Facebook (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)

Filed Under: Finance, Real Estate Tagged With: loans, real estate

Reader Interactions

Tell Us What You Think! Cancel reply

Primary Sidebar

  • Instagram
  • Twitter
  • Facebook
  • LinkedIn
  • Pinterest
  • TikTok

“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.

As we know from history, good people don’t spend As we know from history, good people don’t spend their time harassing marginalized communities. 

Think Hitler, think slave owners, think people who created assimilative boarding schools for Native Americans…

In honor of respecting other people, here are today's truths: 

1. Good people don’t spend their time harassing marginalized communities. 

2. Emotionally mature people don’t require “power over” others to be ok with themselves. 

3. Healthy people allow others to be who they are, not who they want them to be in the name of their own self-comfort. 

4. Diversity is a constant of nature. 

Which one is your favorite?
People will honk if you change lanes. Let them. People will honk if you change lanes. Let them. 

Let me know in comments if you (wholeheartedly) agree. 💙
How to get 400% returns in real estate! Enjoy th How to get 400% returns in real estate! 

Enjoy this clip from my recent podcast, “Kelsey Jang, Army Engineer Officer & Company Commander, on Getting Started In Real Estate“.

Listen to the podcast itself (link below) to hear Kelsey (@kelshjang)share her experience with buying her first rental property priced at only $110K with 10% down.

It will provide you with a real-world example for how to get started in real estate—and start enjoying outsized gains!

Listen here: https://podcasts.apple.com/us/podcast/what-you-shouldve-been-taught/id1523094339?i=1000591353528

Have questions? Ask them in comments ⬇️
Credit Scores: Quick tips and tricks for driving y Credit Scores: Quick tips and tricks for driving your credit score up ⬆️

Which tip here was the most helpful? Let me know in comments… 💵🤔

Also, what topic would you like to learn more about next? 🤓
There are many things that bring me great joy, but There are many things that bring me great joy, but here are three of them: 

1. Top surgery, which has helped me to feel deeply present in my body 

2. Beanie’s furry and funny face 🥹

3. My incredible wife, whose uniqueness and spunk I cherish! 

Notice that none of these are professional or financial or even personal accomplishments…

They are simply profoundly beautiful parts of life. The best and most sacred parts, really. 

If this resonates, leave a 💙 in comments … wishing you all deep joy today too ☺️🏳️‍🌈🏳️‍⚧️
“Your gentleness for yourself with change the wo “Your gentleness for yourself with change the world.” -Grace Kellawon

My life isn’t perfect, but it is carefully and intentionally crafted.

Truthfully, it has been an incredible process to trust myself over the barrage of noise society will throw at you—but to me, that’s some of life’s most important work. 

This is why I will always aim to be gentle with myself — and, I hope, with others too. 💙

Photo notes: 

We’ve got a beaver up in these parts! 🦫

My wife Erin, the beekeeper, has serious skills with it comes to lighting her bee smoker, lol 🔥🐝

Rainbows are beautiful 🌈
Load More... Follow on Instagram

Recent Posts

Gender Spectrum

Gender Spectrum: A Scientist Explains Why Gender Isn’t Binary

Manufactured home community (MHC) investing

Top 5 Reasons to Invest in Manufactured Home Communities

Is a 401k worth it

Why 401K’s Are A Bad Idea

master-list-of-real-estate-syndicators

Master List of Real Estate Syndicators for 2023

Categories

  • Biohacking
  • Confidence
  • Cryptocurrency
  • Entrepreneurship
  • Exclude
  • Finance
  • Fitness
  • Gold and Silver
  • Increasing Income
  • Investing
  • LGBTQ+
  • Nutrition
  • Podcast
  • Real Estate

Ask a Podcast Question | Contact Us | Terms of Use | Privacy Policy

COPYRIGHT © 2019 · CADEHILDRETH.COM | PHONE: ‪(202) 660-4705‬  | 800 CORPORATE DRIVE, SUITE 301, STAFFORD, VA 22554, USA

 

*Disclaimer: Nothing on this site should be construed as medical, health, or financial advice. Before making any health decisions, you should consult with your doctor. Before making any financial decisions, you should consult with professional adviser, such as a financial planner or CPA.