5 Important Issues You Need To Know Before Applying For A HELOC
Hey Reader,
If you’re a homeowner, you may be “equity-rich.” Sounds exciting, right? This means you’ve built up a lot of equity in your home, giving you more financial options. Several reports have highlighted how home equity has grown across the U.S. Here’s a quick look:
Federal Housing Finance Agency: U.S. home values have appreciated every year since 2012.
ATTOM Data: Nearly 50% of U.S. homes with mortgages were “equity-rich” by late 2024.
CoreLogic: Homeowner equity increased by 8% in 2024 alone.
What Does “Equity-Rich” Mean?
In real estate, a home is considered "equity-rich" if the mortgage balance is 50% or less than the home's current market value. Here’s an example:
Sarah bought her home 15 years ago for $400,000 and has steadily paid down her mortgage. Today, her balance is $150,000, but her home is now worth $600,000. Sarah’s loan-to-value ratio is 25% ($150,000/$600,000), well below 50%. This makes her equity-rich! She owns 75% of her home’s value, giving her flexibility to borrow against it or sell with a strong profit.
Many homeowners like Sarah are using their home equity for different financial goals. According to the Federal Reserve Bank of New York, there was a surge in demand for Home Equity Lines of Credit (HELOCs) in 2023. Homeowners are tapping into HELOCs to consolidate debt, make home improvements, or even fund vacations. They're also using these loans to start businesses or cover college expenses.
Maybe you're curious about using your home equity too. Before jumping in, here are 5 things to consider.
1. HELOC vs. Home Loan
HELOC: A HELOC is like a credit card tied to your home. It allows you to borrow multiple times within a set period, usually with a 10-20 year repayment period. This option is best if you need flexibility in accessing funds over time.
Home Loan: With a home equity loan, you get a lump sum all at once. It’s a good choice if you need a specific amount for a one-time expense.
Tip: Think about your needs—flexible access to funds or a single cash payout?
2. Interest Rates
Most HELOCs have variable interest rates, which can change over the life of the loan. These rates usually depend on the U.S. prime rate plus a margin set by your lender.
Your rate is also affected by your credit score, income, and debt-to-income ratio.
Example: Sarah’s bank adds a 1% margin to the prime rate for her HELOC. This means her interest rate may rise or fall with the prime rate.
Tip: Variable rates mean your monthly payments could increase. As a result, it's important to budget for possible rate changes.
3. Application Process and Fees
Applying for a HELOC or home loan often requires proof of income, employer details, investment records, and mortgage payments. It’s a bit like when you first bought your home.
Closing costs may apply and vary by lender. Closing costs may include appraisal, documentation, application fees, and more. Some lenders combine these into a single “origination fee.”
Tip: Check with your lender about all the fees involved to avoid surprises later on.
4. Repayment Terms
A HELOC has a “draw period” where you can borrow up to your limit, usually with interest-only payments. After the draw period ends, you enter the repayment phase. This is where you pay both principal and interest for up to 20 years.
Tip: Be ready for higher payments when the repayment period begins. Make sure your budget can handle the changes.
5. Additional Debt and Risk
Remember, a HELOC is secured by your home. If you miss payments, the lender can take possession of your property.
HELOCs make it easy to access funds, which may lead to overspending on non-essentials. Also, if your home’s value drops, you could owe more than the house is worth.
Tip: Only borrow what you truly need. Using home equity is a big decision. Responsible spending helps protect your financial future.
Conclusion
So, if you’re thinking about tapping into your home equity, take a step back. Weigh the pros and cons. Make sure it fits your goals and financial plans. By understanding these key points, you’ll be able to make smart decisions that support your financial future.
🎓What I Have Learned
I will forever believe that buying a home is a great investment. Why? Because you can’t live in a stock certificate. You can’t live in a mutual fund. Oprah Winfrey
✒️Guest Author
Are you ready for your first meeting with a financial advisor? My friend Connor Tyson, a Registered Investment Advisor says, the more prepared you are, the better the advisor can help you, setting you on the path to financial success. Learn how you can get ready by reading his blog Want to Learn Essential First Steps Before Meeting a Financial Advisor?
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- Take several 10 minute breaks each day. It's a great way to destress.
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- This is a great time to do some end of year planning, especially before the flurry of holiday activities and stress set in. Evaluate your budget and make any necessary adjustments.
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D. Abuse Standards Infraction Filing (ASIF)
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