What Is a Home Equity Line of Credit (HELOC) Loan & How Much Can You Borrow?

Every homeowner could use a little extra cash every now and then. From renovations and repairs to painting and landscaping, it seems like there’s always another project on the horizon. 

But did you know that you can use a home equity line of credit (HELOC) loan to borrow money when you need it?

If you’re interested in leveraging the value of your property to access a steady credit line, here’s everything you need to know about home equity line of credit loans and the HELOC maximum loan amount.

A home equity line of credit loan is a secured loan that lets you borrow against the equity of your own home in order to access a revolving line of credit. A HELOC loan usually carries a lower interest rate than other traditional loans and depending on the situation, interest may even be tax deductible.

A HELOC loan is different from a traditional home equity loan. A home equity loan typically comes with fixed payments and fixed interest rates while a HELOC loan usually has variable interest rates and variable minimum payments. 

Home equity loans consist of a set lump sum while HELOC loans use a revolving line of credit. In other words, home equity loans are based on a fixed amount of money which the borrower receives in a lump sum upfront. Unlike a home equity loan, a home equity line of credit can be depleted and replenished as needed throughout the draw period of the loan.

Both HELOC loans and home equity loans use the borrower’s home as collateral and allow borrowers to access funds for various purposes.

A home equity line of credit can be highly beneficial for homeowners in need of some extra cash, it might not necessarily be the right type of loan for everyone. Before you decide to apply for a HELOC, there are a few things you should consider. 

• Do you have stable income? – The total length of a HELOC loan can be thirty years or longer. Make sure that you have some form of reliable income to cover monthly payments. 
• Are you willing to pay upfront costs? – The HELOC process can involve several upfront fees including the initial application fee, home appraisal costs, title search fees, and more. Be sure you have these costs in mind before you apply.
• Do you really need the money? – A HELOC isn’t always the right choice for borrowers looking for a small line of credit. Consider applying for a credit card instead of a loan.
• Are you borrowing for the right reasons? – It’s not advisable to use the money from your HELOC to pay for luxuries and amenities. Even using a HELOC for basic everyday expenses isn’t recommended. 

A home equity line of credit is best reserved for making necessary improvements to your property, to debt consolidation, or investing in wealth-building activities. 

In fact, the best use of a HELOC loan is to make long-term improvements to your home to increase property value. You could use the cash from a HELOC to pay for an overdue paint job or structural renovations. You could finally convert that basement space or even add a new porch or patio.

A HELOC loan acts something like a credit card with a variable interest rate or fixed interest rate. You borrow what you need and repay the outstanding balance in monthly installments. You can repeatedly take out cash and pay off the outstanding balance, but the time that you can draw funds from your HELOC is limited. 

A home equity line of credit loan can be separated into two main timeframes; the draw period and the repayment period.

Draw Period

The draw period is the first part of a home equity line of credit loan. The exact length of the draw period can vary, but it typically lasts for about 10 years. In the draw period, you can borrow money from your home equity credit line using check, transfer, or through a linked account. 

The minimum monthly payment usually consists of interest-only payments. But it’s generally a good idea to pay off the principal as well. The more of the principal you pay off in the draw period, the lower your credit monthly payment will be during the repayment period.

Repayment Period

In the repayment period, borrowers can no longer draw cash from their home equity credit line. As the name suggests, this is the period in which you must pay back the loan in monthly installments consisting of the principal plus interest. Like the draw period, the exact length of the repayment period varies but is usually around 20 years. 

It’s a good idea to try and pay off as much of the principal as possible early into your HELOC loan. At the close of the loan, some borrowers may be faced with closing costs of the remainder of the unpaid principal. So as the end of a HELOC loan approaches, it’s advisable to negotiate a term extension or other refinancing options.

The steps of getting a HELOC loan can be compared to the process of buying or refinancing a home. There are several phases of the loan process, but it ultimately boils down to finding the right lender, having the right documentation, and being creditworthy. 

• Assess your finances – Take a bird’s eye view of your financial situation before diving into a HELOC. After all, your home is at risk if you can’t keep up with payments. 

• Determine your home equity – Take the current market value of your home and subtract the amount you still owe on your mortgage. This number should be about 20% of your home’s value for the best chance of getting a home equity line of credit loan. Your home equity will help lenders to determine your loan-to-value ratio.

• Calculate what you’ll need to borrow – Most lenders will allow you to borrow up to 85% of your home value minus the remaining amount on your mortgage. Try to estimate the cost of your project or purchase and compare it to the size of your potential HELOC.

• Find the right lender – It’s always a good idea to shop around for the best interest rates and qualifications for you. Be sure to stop by Excel Federal Credit Union to learn how our loan experts can help you. 

• Submit your application – Once you’ve chosen a lender, you can submit your application. Make sure that you have all proper documentation such as proof of income, proof of homeownership and insurance, and so on. 

• Review disclosures – After you apply, you’ll receive a set of disclosure documents that outline the terms and conditions of your HELOC loan. Be sure to thoroughly review these documents and ask your lender any questions you may have.

• Wait through the underwriting process – The underwriting process could potentially last for several weeks during which your lender may ask for an additional home appraisal. 
• Sign closing paperwork – Finally, you’ll need to sign the closing paperwork. After this last step, the line of credit will become available.

If you want to borrow against your home’s available equity but don’t want to commit to a home equity loan or HELOC loan, you can also choose a cash-out refinance. A cash-out refinance pays off your primary mortgage and results in a new mortgage loan

The HELOC maximum loan amount depends on several factors including the overall value of your home, percentage of home value that lenders will let you borrow against, and the remaining loan balance still owed on your mortgage. 

Your home’s current value multiplied by the percentage of value that your lender allows you to borrow is how much equity that can be borrowed. 

Based on this number, you can subtract the remaining balance of your first mortgage and reach the maximum amount you can borrow.

For example, let’s say your home is worth $500,000 with a balance of $300,000 on your first mortgage. And let’s say that your lender will allow you to borrow against 85% of your home’s value.

So, you would take the value of your home and multiply it by the percentage the lender will let you borrow. 

$500,000 x 0.85 = $425,000

From there, you’d subtract the amount you still owe on your mortgage to reach the approximate maximum amount you can borrow with a HELOC loan.

$425,000 – $300,000 = $125,000

There’s never been a better time to apply for a home equity line of credit loan. Right now, the housing market is driving up prices of homes across the country and many homeowners may have extra equity at their disposal. 

But really, the decision to apply for a HELOC loan depends on your particular goals and financial situation. So, if you’re debating whether or not to apply for a HELOC loan, talk to the financial experts at Excel Federal Credit Union.

We offer competitive interest rates and flexible terms on our home equity line of credit loans. You can apply online quickly and easily with our convenient online application. And you’ll never have to worry about closing costs on loans of $100,000 or less. 

From home equity lines of credit loans to savings accounts, mortgage loans, and more, you can trust Excel Federal Credit Union to support you through every step of your financial journey.