Undressing The Heloc Loan
Welcome to undressing the heloc loan. After reading this article I hope you will have a better understanding of its basic function and ways to utilize it to pay yourself first. You’re probably wondering how can borrowing money help pay you first? Keep reading for those answers and many more ideas in all things HELOC!
Please reach out to me for industry proven ways to improve your home's value or find out what your home is worth.
A home equity line of credit (HELOC) is a line of credit that uses the equity you have in your home as collateral. The amount of credit available to you as a borrower is dependent on the equity in your home, your debt-to-income (DTI) ratio and your credit score. Because this loan is secured by an asset, they tend to have higher credit limits and much better interest rates than credit cards or personal loans. You can utilize these to continue to add value into your home.
Requirements For A HELOC?
Requirements vary with each lender, but generally, borrowers will need:
- More than 15% equity in their home
- A 600 or better credit score
- At least two years of verifiable income history
- A Debt to Income (DTI) ratio of 40% or less
When a (HELOC) is used conscientiously it can be a powerful tool for borrowers to:
- consolidate high-interest debt at a lower rate
- make substantial improvements to their home
- invest in real estate
Here's The Breakdown To Undressing The Heloc Loan:
How a HELOC is typically structured:
- Amortizes (is paid off) over 30 years
- The first 10 years are Interest-only payments (They are adjustable rates! Payments are not fixed)
- The loan is then paid off in the remaining 20 years, with the addition of the principal payment
Why is this beneficial?
- Because of this, the payments are almost always less than a personal loan, even during the repayment period.
- Also…10 years is a long time to pay the loan off voluntarily
- You don’t have to touch the interest rate on your first mortgage (keep your Covid-Low Locked-In Rate!) as you would through a cash-out refinance
Turn your home’s equity into a (very cheap) credit card:
- Depending on the product, you can access up to 100% of the equity
- YOU ONLY pay on what you draw, and you DO NOT need to draw the full amount
Example: You have $1M home value, and $500k in Equity
Why is this beneficial?
- You then take out a $500k HELOC
- You only draw $300k of that HELOC
- You then still have 20% Equity in the home
- You only pay interest on the $300k
- If you draw nothing from it, you will typically only pay an annual service fee, which is usually low.
Cheaper than an Amex account (and almost any credit card), with a very similar structure
- Having a safety net going into a recession will be KEY to surviving it
- Average homeowner gained $117,000 (California average) in equity over the last year
Have A HELOC Exit Strategy!
Two Primary Strategies:
- Pay it off when rates drop through refinancing your first mortgage “absorb the second into a larger first mortgage”
- Pay it off in chunks with large bonuses, commissions, etc.
- Pay it off when you sell your home (again…10 years is a long time) Especially beneficial if funds are used to improve your home
Why is this beneficial?
- If you plan to use the equity in your home to improve your home, you have a high likelihood of gaining more than you are borrowing in additional equity.
Example: Using a HELOC to upgrade your kitchen can be a considerably better opportunity cost while adding value to your home rather than the traditional cost of a remodel!
If you are planning to purchase an investment property, you can use any profits from your renters to pay off this loan before it goes to repayment
- You can utilize these to purchase homes by opening a HELOC on a property as part of the purchase. You can use the HELOC as down payment in this scenario.
Sterling Pounds Senior Mortgage Advisor
NMLS# 2072030 Office: 949.354.0351 Mobile 949.397.6262 sterling@teamlegacymortgage.com teamlegacymortgage.com
David Clark Real Estate Advisor
DRE # 02134556 Office: 310.231.6544
david@shelhamergroup.com
Welcome to undressing the Heloc loan. Thank you for reading this article I hope you have a better understanding of the Heloc loan’s basic function and ways to utilize it to pay yourself first. Let’s keep the dialogue going and I am here to answer any further questions you may have. Whether on the Heloc or how to get into the real estate market, listing your home with me and earning top dollar I am here.
Written in collaboration with one of our preferred lenders Senior Mortgage Advisor Sterling Pounds of Team Legacy Mortgage in Irvine California.
