What is a Home Equity Line of Credit (HELOC)?

Simply put, a home equity line of credit is a loan you can take out using your existing home as collateral. But what does that mean and how does it differ from a home equity loan? Both a home equity loan and a line of credit use your home as security that you will repay the loan. A major requirement in both situations is that your home must be worth more than your remaining mortgage. This is not a difficult requirement to meet since, in most cases, homes increase in value from the time of purchase.

Missouri Central Credit Union offers the best home equity loans and lines of credit with a maximum of 95% loan-to-value for qualifying members. Meaning you can get a larger home equity loan amount.

How does a HELOC work?

A home equity loan functions as a traditional loan. When you are approved, you receive a large sum of money all at once. A home equity line of credit operates more like a credit card. As opposed to the equity loan, you are approved for a line of credit up to a certain amount and you can access as much of that money as you would like at any given time. A traditional home equity loan has a fixed interest rate but you must pay interest on the entire loan amount. A home equity line of credit will usually have a variable interest rate but you only have to pay interest on funds that you withdraw from the equity loan.

It is helpful to know how much equity your home has acquired before applying for or refinancing a home equity loan. Most lenders will let you borrow up to 85% of your home’s value. Your equity is simply the value of your home, less the amount you still owe on your mortgage.

  • An example would be if your home is valued at $150,000, but you still owe $75,000 on your mortgage, you have 50% equity. The most a federal lender may grant you would be a 35% equity loan, or $26,250.
  • The less you owe on your home, the larger home equity loan amount you might qualify for.

The most important thing to understand about home equity loans is that your home is being used as a guarantee that you will pay off the lender. If you don’t pay your equity loan off, your lending agent can foreclose on your house.

Qualifying for a HELOC

According to NerdWallet.com, there are only a few requirements to qualify for a home equity line of credit or home equity loan. You need to have:

  • A credit score of 620 or higher
  • A strong history of paying bills on time
  • Accrued at least 15-20% equity on your home
  • A debt-to-income (DTI) ratio no higher than 43-50%

Your DTI is essentially the percentage of your monthly income that is required to pay your bills and mortgage. If you bring home $3,000 and it costs you $1500 to pay your student loans, utilities, mortgage and car payment each month, your DTI is 50%.

What can you use a HELOC for?

Home equity loans and lines of credit can be used for a multitude of things but the best options are to make home improvements and pay off debt. When you use your equity loan to make home improvements, you are helping to get a larger return on your investment. Boosting your home’s current value can ensure a higher asking price if and when it is time to sell your current dwelling which makes paying off the equity loan faster and can even help you refinance a home equity loan for a better interest rate.

If you have a great interest rate on a home equity loan, it may be worth it to utilize those funds to pay off any existing debt you have. The interest rate on the best home equity loans is far lower than any credit card interest rate meaning you have less to pay off in the long run. This option is only effective if you resolve to manage your debt and don’t allow it to accrue again. If that happens, you will wind up paying double (the home equity loan and new credit card debt) and left with no repayment options.

Missouri Central Credit Union has exceptional home equity loan terms and home equity line of credit rates. When you are ready to boost your property value with some much needed home improvement projects, come see us first and ask about all of your equity loan options.