Home Equity Line of Credit Requirements

What Is a Home Equity Line of Credit?

Simply put, a home equity line of credit is a revolving credit line borrowed against the equity you have in your home (your home’s market value less the amount remaining on your existing home loan). A home equity line of credit allows you to liquefy your home equity, turning it into cash. Using your home as collateral, a HELOC helps you access a large amount of money to be used for almost any reason such as tuition, repairs, medical bills or to cover other substantial expenses when tapping into your savings is not an option.

The Difference Between a Home Equity Loan and a Home Equity Line of Credit

You might, sometimes, hear this type of loan called a “home equity loan line of credit.” This term, however, actually combines the names of two separate types of loans: a home equity loan and a home equity line of credit. The biggest difference between the two is the way funds are distributed. With a home equity loan, borrowers receive a single lump sum, while the proceeds from a HELOC are distributed only as needed.

In addition, home equity lines of credit and home equity loans also typically have different interest rate structures; HELOC interest rates are usually variable, and home equity loans typically feature fixed rates. This interest rate structure, however, is not set in stone and could vary depending on the individual loan, lender and financial institution.

How Does a Home Equity Credit Line Work?

Depending on your credit history, ability to repay the loan and other financial information, a home equity credit line could allow you to access up to 85% of your home’s equity. To determine the maximum home equity line of credit for which you could potentially qualify, calculate 85% of your home’s value and subtract the remaining amount owed on your existing mortgage.

For example, if a borrower’s home is worth $300,000 and he or she currently owes a remaining $100,000 on his or her existing mortgage, then:

• $300,000 x 85% = $255,000
• $255,000 – $100,000 = $155,000

Assuming this borrower has excellent credit and enough verifiable income to afford payments, in this scenario, the borrower would qualify for a home equity line of credit in an amount of up to $155,000.

Understanding HELOC Interest Rates and Loan Terms

A home equity credit line works similarly to a credit card. It has a maximum borrowing limit. Borrowers access funds as needed and pay interest on only the advanced amount. You can use a home equity line calculator to see how these interest payments work.

Unlike credit cards, a home equity line of credit has set borrowing terms (time limitations). HELOC borrowing terms are often split into two separate periods: the draw period and repayment period. During the draw period, which on average lasts about 10 years, the borrower can continue to advance funds from the HELOC up to the maximum approved loan amount. Once the draw period ends, the repayment period begins. During the repayment period (about 20 years on average), loan advances will no longer be permitted, and the borrower will make regular payments of both principal and interest until maturity or the loan is paid in full.

The Difference Between Open-End and Closed-End Home Equity Credit Lines

Most home equity credit lines are considered open end, however, sometimes a lender or borrower will decide on a close end HELOC. Be sure you understand the difference between the two before selecting a HELOC mortgage.

• Open End – An open end HELOC is truly a revolving credit line. During the draw period, a borrower can reach the loan limit, pay down the principal balance and then re-advance the same funds.
• Close End – When a HELOC mortgage is considered close end, the borrower is only allowed to advance the full amount of the loan one time. This means that if during the draw period, the borrower advances up to the loan limit and then repays some of the principal, the borrower cannot re-advance those funds. In this sense, the draw period ends once the borrower reaches the originally approved loan amount. The borrower can then pay down the principal or continue making interest-only payments until the repayment period officially begins.

Qualifying for the Best Home Equity Line of Credit Interest Rates

Several factors including credit history, credit score, loan term and amount, equity and a base rate (like the Wall Street Journal Prime Rate) determine HELOC interest rates. Variable home equity line of credit rates adjust based on a predetermined schedule. Your payment amount will change with the interest rate and as you advance more on the loan.

Experiment with a home equity line calculator to see how loan terms and variable home equity line of credit interest rates will affect the amount of your loan payments during both the draw and repayment periods.

Home Equity Line of Credit Requirements

To qualify, you must meet certain home equity line of credit requirements. These include available equity in your home, verifiable income and ability to repay. In addition, your lender will consider your employment history, credit history, existing debt and might require an appraisal or a comparable market analysis on your property.

Applying for a Home Equity Line of Credit Online

You can tap into your home’s equity with a HELOC. Applying for a home equity line of credit online is easy. A lender will review your loan application, guide you through the process of gathering and submitting any necessary documents and be available to help you every step of the way.