Navigating and Understanding a Home Equity Line of Credit (HELOC)

Have you found yourself interested in a Home Equity Line of Credit (HELOC), and want to know if it’s the next step in your homeownership journey? There are many things to consider before applying for a HELOC. This blog will cover what’s required for your application and some benefits of having a HELOC.

“A HELOC is a type of loan that allows homeowners to borrow money using the equity in their home as collateral,” said Tara Long, Coastal’s VP of Consumer Lending. “We’ve seen an increase in Home Equity Lines of Credit applications and usage in the current rate environment. The majority of homeowners were able to take advantage of the very low-interest rates of 2020 and 2021, and as a result, they’re hesitant to refinance their mortgages in order to tap into the equity in their homes, so they’re looking to HELOCs as an alternative.”

HELOC Benefits:

• Flexibility: A HELOC provides flexibility regarding how much and when you can borrow. You can borrow what you need when you need it, then make payments on the amounts you borrow.
• Low-cost financing: A HELOC typically has a lower interest rate than credit cards or unsecured personal loans, making it a cost-effective way to borrow money.
• Credit line increase: Your credit line can increase with the appreciation of the value of your home, giving you access to more funds when you need it. Most lenders require a new application/appraisal or property valuation and credit approval to increase a HELOC.
• Access to funds in case of emergency: A HELOC can provide peace of mind, knowing that you have access to funds in an emergency, such as unexpected medical expenses or home repairs.
• Tax deductions: Interest on a HELOC may be tax-deductible if the funds are for home-related expenses. You can talk with your tax advisor to see what qualifies.

What do you need to apply for a HELOC?

• Determine your eligibility: To qualify for a HELOC, you typically need a good credit score, a low debt-to-income ratio, and a certain amount of equity in your home.
• Gather required documents: The lender will likely require documentation such as proof of income, homeownership, and insurance, to name a few.
• Submit your application: Work with your local lender to submit your completed application along with all the required documentation to the lender.
• Wait for the lender to process your application: The lender will review your application and credit history. They may also order an appraisal of your home to ensure the value and equity are up to date. The processing time varies depending on the lender and the completeness of your application.
• Get a credit decision: The lender will let you know if you are approved for a HELOC and the loan terms.
• Sign loan documents: If you decide to move forward with the HELOC, you will need to sign loan documents and provide any additional information requested by the lender.
• Get your funds: Once the lender has processed your loan and the documents are signed, the funds will be disbursed to you.

The specific requirements and steps may vary from lender to lender, so be sure to ask about any additional requirements or steps that may apply to you. When deciding if a HELOC is right for you, the interest rate and collateral must be kept in mind. The interest rate will likely be variable and change over time, affecting the total interest you pay on the loan. Additionally, a HELOC is a secured loan, which means that your home is used as collateral, and if you default on the loan, your home may be foreclosed. If you’d like more information, or if you don’t know if a HELOC is the right path for you, we can help!

You can also take a look at the HELOC Brochure from the Consumer Financial Protection Bureau: https://files.consumerfinance.gov/f/documents/cfpb_heloc-brochure.pdf