A home equity line of credit allows you to borrow against the equity in your home. So now you may wonder, how does your home build equity? Equity is basically the value of your home, less any outstanding liens—such as a mortgage. So let’s say, for example, that your home is valued at $200,000 and you still owe $100,000 on your home’s mortgage, then your home’s equity is currently at $100,000.
HELOCs are a revolving line of credit; they work like your credit card. Let’s suppose, you have a HELOC of $100,000, then you can draw up to $100,000 when you need the financial resources. So you only pay interested on the amount you use. For example; if your house needs a new roof and it costs $20,000 to replace it, you can draw that amount from your $100,000 credit line. Draw periods are usually 5 to 10 years, during which you are required to make payments. You may only have to pay interest during this period or may have to make payments to both interest and principle. The term of the HELCO and the payback requirements will be dependent on the financial institution.
You do need to remember that your loan value will usually be less than the equity of your home. The concept is similar to getting a mortgage. According to WSJ, “Most home-equity loans and HELOCs use the following formula to determine how much to lend: 75-80% of current home’s value (determined by an appraiser’s visit, which you pay for) minus the amount you owe on your mortgage. However, some lenders will lend you even more than 80% of the value of your home – up to 100% or even 125% of the home’s appraised value.”
What is the difference between a HELOC and a Home Equity Loan?
A Home Equity Loan (also known as a second mortgage) normally offers a fixed rate for the life of the loan with a set payment amount and term. You receive the entire loan amount at the time of closing and once the amount is paid in full, the Home Equity Loan will be closed.
A Home Equity Line of Credit gives you the option of borrowing only what you need, when you need. According to our Lending Director, Michael Smalley, “Both are great options. A HELOC is intended for a member who desires flexibility and may not be spending the entire amount right away. This type of loan also is great to have as a safety net.”
What kind of interest rate do I get with a HELOC?
Just like your credit card, the home equity line of credit normally has a variable interest rate that fluctuates over the life of the loan. Most lenders base their HELOC rates off of the Prime Interest Rate. So the interest rate on your HELOC could change a number of times throughout the life of the line. Therefore, payments on your HELOC draw will vary depending on the prime rate and how much you have borrowed.
How do I take an advance on my HELOC?
You can draw on the credit line by writing a check, or transferring the funds to your checking account or in other ways depending on the financial institution. At Century Federal, you can transfer needed funds to your Century Federal checking account and use at your discretion. We can also provide a HELOC checkbook for those who want the option.
Will I need an appraisal if I apply for a new HELOC or request an increase to my current HELOC?
The purpose of an appraisal is to provide an accurate value of your home to help determine the available equity. Whether or not you need an appraisal is largely dependent on the amount you borrow. Financial intuitions use various resources to get an accurate valuation of a home. Appraisals may be needed for both new HELOCS and existing ones for which you want to increase the value.
Century Federal uses an automatic valuation model (AVM) which determines the value of your home based on public records and also based on records from financial institutions responsible for title insurance. You will also need to provide the title documents, insurance documents and property tax documents to determine the accurate value of your home. The documentation will be needed for new HELOCs and if you want to increase the value of your existing HELOC. However, if the AVM does not the match the values the borrower expected, a formal appraisal may be required.
What type of fees will I incur when I apply for a new HELOC or request an increase to my current HELOC?
Many financial institutions charge an annual fee for a HELOC irrespective of whether you draw an advance or not. The fee amount will vary based on the financial institution. Also, depending on the HELOC amount you require, you may need a formal appraisal. In the event of a formal appraisal, financial intuitions will charge you an appraisal fee.
There may also be additional fees involved in the event that you want to close the line earlier than the term requested. You can incur fees if you close the loan within the first 12-18 months. Fees for closing the HELOC early can vary from $350-$500. So make sure to read the fine print carefully so that you are aware of the different fees associated with a HELOC.
Century Federal HELOC
Century Federal offers HELOCs with a minimum credit line of $5,000 and a maximum credit line of $250,000. We offer a HELOC for up to 85% Loan-To-Value, i.e. that the line amount will be 85% of the available equity in your home. The draw period for our HELOC is 13 years from the origination date. We do require a formal appraisal for a HELOC of $125,000 and above.