Should I Get a HELOC?

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Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343

Should I Get a HELOC?

 

Thankfully, many of our clients are happy with their mortgages.  The interest rate, the terms, the peace of mind --- all are satisfactory and there's no motivation to change or refinance.  But what happens if there's a need to use the equity in the home to finance a remodeling project, a large purchase or to just have a "safety net?"  A home equity line of credit or "HELOC" can be used to meet these purposes, but should you get a HELOC and, if so, how do they work?

 

What Is a HELOC?

A home equity line of credit, or HELOC, is most often a second mortgage or junior lien, that "goes behind" your existing (first) mortgage.  Unlike a traditional "closed end" mortgage that is fully-amortized, a HELOC usually allows the borrower to draw a balance on a line or limit, then pay it back and repeat the process again.  So, where your typical mortgage may start at $400K, for example, and with every payment made will see its balance reduced a little further until completely paid off, a HELOC might have a limit of $50K.  Our homeowner may "draw" $35K on the line to purchase a vehicle, then pay it back in the span of a few years and until the balance is at zero.  Later, there may be another need for all $50K in order to remodel the kitchen of the home and our borrower could again write a check against the line for that amount.  A good analogy for a HELOC is a credit card.  You have a limit and you have a balance, and the balance can go both up and down depending on your use and repayment.

 

As the name would imply, a home equity line of credit allows the homeowner to access the equity in the home.  What does this really mean?  Let's use an example.  We'll say our home is worth $500K.  The owner has a first mortgage of $400K, so the loan-to-value (LTV) is 80%.  The owner therefore has 20%, or $100K, of equity in the home.  Some of our HELOC programs allow a combined loan-to-value (CLTV) of 90%, so in this case the homeowner could take a line of credit for $50K (10% of value and a CLTV of 90%).  The HELOC now gives the owner access to some of the equity without having to do a cash-out refinance, which might be expensive or, in many cases, impossible.

 

How Do HELOCs Work?

Let's first differentiate between a home equity line of credit (HELOC) and a fixed rate second mortgage.  The latter is simply a junior lien of (usually) 10, 15 or 20 years that often has a fixed rate and is fully-amortized.  You pay it down just like your first mortgage.  But a HELOC, as explained above, works differently and as a result, usually has two distinct periods during its full term; the draw period and the payback period.  A HELOC's full term might be anywhere from 15 to 30 years, and some even have a balloon feature, so you have to ask every time.  But let's examine a common HELOC program we offer.  It has a 30-year term.  The first 10 years are the draw period.  You can access the line electronically or with checks.  Your payments during the draw period are interest-only, but you can pay the principal balance back as you'd like at any time.  After the draw period, the HELOC will convert to a fully-amortized payment for the remaining 20 years  and the draw feature ends.  During the entire term, the interest rate is adjustable and tracks Prime Rate.  The line of credit will have a margin over or under Prime and this combination (index + margin) is considered your fully-indexed rate or "FIR."  

 

Home equity lines of credit are the most common kind of second mortgage and they can serve many purposes.  Because they allow access to the equity in a home without having to actually service any debt, we see many of our clients open a line of credit and save it for a rainy day.  Others will use it to replace the roof on their home to assure a rainy day doesn't end up inside the home itself.  Either way, promoting an understanding of how HELOCs work is something we're happy to share.  Get in touch if we can help you unlock the mystery of a home equity line of credit.

 

Loc, stock and barrel, 

 

 

Robert J. Spinosa
Vice President of Mortgage Lending

Guaranteed Rate
NMLS: 22343 
Cell/Text: 415-367-5959 
rob.spinosa@rate.com

 

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960

Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
 

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate's Human Resources Department.

 

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 - (866) 934-7283

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Ambassador
1,838,142
Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

We had a heloc in the past and it worked well for the reasons you describe. It also came with a very attractive interest rate. The only thing we'd never use it for are certain purchases such as a trip, or a nose job. Lol. 

Jul 06, 2019 08:30 AM #1
Rainer
514,781
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

Thanks for sharing all about HELOCs

A home equity line of credit, or HELOC, is most often a second mortgage or junior lien, that "goes behind" your existing (first) mortgage.  Unlike a traditional "closed end" mortgage that is fully-amortized, a HELOC usually allows the borrower to draw a balance on a line or limit, then pay it back and repeat the process again. 

Jul 06, 2019 08:47 AM #2
Rainmaker
3,061,215
Nina Hollander
Coldwell Banker Residential Brokerage - Charlotte, NC
Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor

Hi Rob... nice "primer" on HELOCs. Lots of home owners really don't know how they work and when it's best to use them versus another form of financing.

Jul 06, 2019 08:52 AM #3
Rainmaker
1,310,375
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Rob,
Nice explanation of HELOCs and the difference between them and second mortgages.  I love the flexibility of HELOCs.

Jul 07, 2019 12:33 PM #4
Rainmaker
1,310,375
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Congratulations. You've been Featured in the BananaTude Group

Jul 07, 2019 12:41 PM #5
Rainmaker
2,519,842
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

You have provided great information about HELOC mortgages, Rob.  I hope you have a great week!

Jul 08, 2019 02:10 AM #6
Rainmaker
2,005,731
Patricia Feager, MBA, CRS, GRI,MRP
DFW FINE PROPERTIES - Southlake, TX
Selling Homes Changing Lives

Your explanation was very thorough and easy to understand! If approved, the money should be used wisely. 

Jul 09, 2019 08:27 AM #7
Rainmaker
1,428,339
Kat Palmiotti
Grand Lux Realty, Monroe NY, 914-419-0270, kat@thehousekat.com - Monroe, NY
The House Kat

Good explanation of a HELOC! We have one, and used it to purchase land. It was a great way to fund future plans.

Jul 13, 2019 03:04 AM #8
Rainer
282,546
Ron Aguilar
Continental Mortgage - Saint George, UT
Mortgage & Real Estate Advisor since 1995

Helocs or close end 2nds are valuable if used smartly. Do not let your desire for instant satisfaction warp common sense.

Jul 16, 2019 07:34 AM #9
Rainmaker
251,643
Doug Kaller
Academy Mortgage, Reno, NV - Reno, NV

Many financial planners recommend having a HELOC or line of credit available in the event of an emergency. They can also be a good tool when buying a home above the maximum conventional limits. You can finance just under 90% and the Conventional / HELOC piggyback combo is easier and faster than a jumbo loan. 

Jul 16, 2019 11:00 AM #10
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Rainmaker
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Rob Spinosa

Vice President of Mortgage Lending, Marin County
Can I Get a Jumbo Loan with 10% Down?
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