What is a HELOC and how does it work?
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Your guide to determining if a HELOC is right for you
How could you HELOC? From booking a dream vacation to tackling debt, the equity in your home may be an answer.
To determine if it’s the right move for you, it’s worth investigating:
- The definition of a HELOC
- How a HELOC works
- HELOCs with fixed-rate flexibility
- What a HELOC can be used for
- HELOC eligibility requirements
- How to apply for a HELOC
HELOC stands for Home Equity Line of Credit.
Home equity: This is the difference between the value of your home and the amount you still owe on mortgages.
Line of credit: A line of credit is a certain amount of money you are approved to borrow by a lending institution. But unlike a traditional loan, you don’t receive all this money in a lump sum. Instead, you have access to it up to your account limit — whenever you want to borrow it.
Put together, a HELOC is access to a certain amount of money backed by the equity in your home.
Bonus: With your house as collateral, the interest rates may be lower than an unsecured loan, such as a credit card or personal line of credit.
Spending the money available to you through a HELOC works similarly to a credit card. Both have an available balance you can borrow against and pay back down. You only pay interest on the amount you actually borrow.
Variable interest rates on HELOCS have two parts — the prime rate plus a margin. The prime rate is the part that changes. It’s a widely used benchmark based on the best rates large banks charge their most creditworthy customers. It’s updated as part of a recurring Wall Street Journal survey. For example, if the prime rate is 4.25%, and the margin is 1.00%, your variable rate would be 5.25%. With a Numerica HELOC, the variable rate adjusts quarterly based on the current prime rate. In most cases, the margin does not change unless you are no longer eligible for a discount you received. (For example, if you received a lower margin for signing up for automatic payments, but you switch to paying manually.)
Pro tip: Numerica members can always view their current HELOC interest rate by logging into Online Banking or the Mobile App.
At Numerica, a HELOC has a 10-year draw period. When the 10 years are up, any remaining balance is automatically converted to a 15-year loan.
The answer depends on your lender. Some financial institutions, including Numerica, allow you to transfer part or all of your HELOC balance to a fixed-rate loan.
The additional flexibility of using a fixed-rate loan comes with potential benefits or uses:
- Protect your balance from the possibility of rising interest rates
- Lock in a specific rate and payment schedule so you’re never surprised
- Enjoy one fixed payment after consolidating debt (such as credit cards that may have higher, variable interest)
At Numerica, a member can maintain up to three fixed-rate loans at a time from a HELOC balance. Plus, there is no fee to convert a variable-rate HELOC balance to a fixed-rate loan.
When people think of HELOCs, they often think of home improvement projects. This is an excellent use of HELOC funding, but it isn’t limited to housing-related costs. Other common uses include:
- Debt consolidation: Need to pay off high-interest credit cards or juggling balances on multiple loans? For some people, a HELOC is a great solution for paying off several balances and focusing on one payment. In many cases, this isn’t only a simplifying option, but a cost-effective one. That’s because HELOC rates are often lower than those on unsecured loans paid off in the process.
- Dream vacations: Ready to gather your loved ones and take that trip you’ve been talking about? A HELOC could be the ticket!
- Big purchases: HELOCs can help you buy boats, RVs, and other toys. Plus, this access to capital may provide negotiating power that simplifies your buying process or saves you money.
A lender will look at several factors to determine whether you qualify for a HELOC. Here are a few considerations when evaluating your eligibility.
- Equity factors: You must have equity in the home to borrow against — 15 to 20 percent is a common industry standard. If you haven’t owned the home long, a good rule of thumb is to wait at least six months before calculating where your equity may be. Depending on your down payment and market conditions, this may or may not be long enough to quality for a HELOC.
- Property factors: While most homes and properties qualify, keep in mind it may be more difficult to get a HELOC for certain types of properties. Second homes, investment properties, or manufactured homes may have special requirements that apply to your application. Geographic considerations may also matter. At Numerica, for instance, HELOCs are limited to properties located in the states of Washington and Idaho.
- Ownership factors: You must own the home. For vacation homes or investment properties, make sure you own it as an individual, not as part of an investment company.
Think you’re ready to rock a HELOC and want to know what to expect from the application process? At Numerica, this typically plays out as a five-step process.
- Talk to us. We want to help you live well, and that starts with answering your questions to determine if a HELOC is a good fit for your situation. You can set up a visit at your favorite branch or call 800.433.1837.
- Submit an application. You can do this online, in a branch, or by phone. You will need to provide information about you and your home. This includes documentation related to your income, insurance, and mortgage statements.
- Receive conditional approval. If the application checks out based on initial information, you move on to the second stage of the application process. This step is all about due diligence. Does the value of the home match the application materials? A third-party company is typically sent out to take pictures and fill out a property condition report. In some cases, a full appraisal or different valuation is scheduled. Are there any title issues that would impact approval? A title company determines if other owners, liens, or loans on the property impact its ability to serve as collateral for the HELOC. Is the home in a flood zone? A search is performed to ensure adequate insurance is in place, as needed.
- Receive final approval. If it’s determined all lending requirements are met, final approval is granted. An appointment will be scheduled to officially sign the documents.
- Fund the HELOC. Your signature triggers a 3-business day period before the HELOC is funded and ready to use. During this time, called a rescission period, you have the ability to cancel the agreement. After 3 days, the funds are available. You can even use Numerica’s HELOC Visa to access the funds.
Is it time for you to rock the HELOC? Whether consolidating debt, booking that vacation, or launching into a home remodel, a HELOC may be the perfect tool to help you live well.
Here’s the legal stuff: All loans subject to approval. Terms and conditions are subject to change.
This article is provided for educational purposes only and is not intended to replace the advice of a financial advisor, loan representative, or similar professional. The examples provided within the article are for example only and may not apply to your situation. Since every situation is different, we recommend speaking to a professional you trust regarding your specific needs.