One advantage of owning a home is building up equity over time. This equity can be used as a home equity line of credit (HELOC). A HELOC is one of the most popular and affordable options for borrowing money.
What is a Home Equity Line of Credit?
Since a HELOC is borrowed against the value of your home equity, you could get a lower interest rate than other types of personal loans. Additionally, it acts sort of like a credit card meaning it’s a continuous source of funds that you can access at any point.
Using a home equity line of credit is perfect for home renovations, large purchases, or any unexpected life events. Decide you don’t need to take any money out? You won’t pay interest on any funds you don’t advance.
Having a home equity line of credit is like having a safety net. It’s there for you as a dependable source of funds if you need it.
How much can I borrow?
The amount you can borrow with a HELOC is calculated by how much equity you have. That amount is the current value of your home minus the balance owed on your mortgage. So if your house is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in home equity.
Typically, lenders will allow you to borrow 75-90% of your available home equity. This may change depending on your credit, income, and lender. In the previous example, this means you would be able to borrow $75,000 to $90,000.
To find out how you can borrow, reach out to a mortgage officer at Voyage.
How are HELOC payments calculated?
Calculating your monthly payment on a HELOC depends on a few varying factors that might change your monthly payment.
1. Current Interest Rates
Home equity lines of credit have adjustable rates, so the interest rate you pay may change.
2. Phases of Line of Credit
The draw period is the term of the line of credit where you advancing funds and are making payments against the interest.
This is the phase of the line of credit when you repay the principal and the interest amount on the balance remaining after the draw period expires. The monthly payment increases due to paying principal and interest payments that are amortized over a set period of time to repay the line of credit in full.
The adjustable rates on a home equity line of credit come with two key thresholds. The first is the lifetime cap. This is the limit of the highest interest rate you could possibly pay. The second is the floor rate. This is the lowest rate allowed on the line of credit.
Above all, a home equity line of credit helps you be prepared for whatever life may throw at you. For more advice on taking out a home equity line of credit, apply online, or give us a call at 605.338.2533.