Have you ever needed to borrow money, but you just weren’t sure how much you’d need? Let’s say you were working on a home improvement project, or you had a sudden emergency that you knew your savings wasn’t going to cover. Maybe you just want to pay off some debt and and you’re looking to lower your interest rate.
Home Equity Lines of Credit (HELOCs) offer the flexibility you need to borrow only as much as you need when you need it.
With personal loans or a home equity loan, you receive a lump sum upfront, and you begin paying off principal and interest right away in regular monthly payments. A HELOC, however, is a loan option that works more like a credit card, with a revolving line of credit instead of one predetermined loan amount.
So let’s get started and we’ll fill you in on the basics of turning the equity in your home into cash when you need it.
How to qualify & borrow with a HELOC
As with any loan, of course, lenders will take a look at your credit history and credit score to determine how much you can borrow and what your interest rate will be. With a HELOC, however, they also look at how much equity you’ve built up in your home.
At University Credit Union, you can borrow up to 80% of your combined loan to value (LTV) ratio.
So what exactly does that mean? To calculate 80% of your home’s LTV, take its current value and calculate 80% (multiply by 0.80). Then, subtract the remaining amount of what you owe on your mortgage. The result is the amount you may be eligible to borrow if you take out a HELOC.
A University Credit Union HELOC has some closing costs, but does not charge annual fees. Be sure to check with your HELOC lender to verify any fees before completing your agreement.
A lien on the property
A HELOC is a secured loan, meaning the lien is placed on the property for the loan amount that the member is approved for, which acts as collateral if they have to default on their loan.
With a HELOC, your lender will typically ask for a lien on your property, which gives your lender a legal right or claim to your home.
What does this mean for how a HELOC works? Once you’ve applied and have been approved, a HELOC works a lot like a credit card.
You’ll be given a credit limit determined by calculating your LTV ratio, in addition to your credit history and credit score. Then, for a certain amount of time known as your draw period (usually about ten years), you borrow as much money as you need, when you need it.
As with a credit card, it’s tempting to borrow more than you may need. But with the right planning, HELOCs can be a very affordable way to pay for bigger projects or expenses.
Typically, lenders only require you to pay interest during the draw period, but if you want to pay the principal as well, your credit limit will go back up.
End of the draw period
Once your draw period ends, you can no longer borrow from your HELOC. You’re now required to pay off what remains of your balance, both interest and principal.
How does a HELOC payoff period work?
Qualifying and borrowing with a HELOC is only part of the overall home equity financing process.
Following your ten-year draw period, you have 15 years to pay off your UCU HELOC. If you have been responsible for withdrawing from your line of credit, you shouldn’t find payments too difficult.
While home equity loans tend to have fixed interest rates, HELOCs often come with a variable interest rate, although there are exceptions, so you should confirm this with your lender.
The good news about HELOCs is that the interest may be tax-deductible. While you will need to speak with a tax professional to find out if this is the case for you, generally speaking, HELOC interest is tax-deductible if you borrowed to fund certain types of home improvement projects.
Other borrowing options
If you need to borrow, but tapping into your home’s equity just isn’t for you, University Credit Union offers members a range of loan options with our Best Rates in the Nation Guarantee.*
From credit cards to student loans, even study abroad loans and loan consolidation, we’ve got you covered!
We also offer personal loans and lines of credit with no application fee, which allow you to borrow as little as $500. Our personal loans have a variety of repayment terms, and our personal lines of credit don’t carry any cost until you decide to start borrowing!