HELOCs can be one of the most useful financial tools in existence for normal, everyday people in existence. As long as. you own your home, and the price has gone up significantly from what you’ve paid, you are probably eligible to get a HELOC as long as you have a stable income. Finding the best Home Equity Line of Credit (HELOC) lender depends on your specific needs, credit score, and location. The ideal lender will offer favorable interest rates, minimal fees, flexible repayment terms, and solid customer service. But before diving into specifics, it’s important to understand how a HELOC compares to other lending options.
What is a HELOC?”
A HELOC, or Home Equity Line of Credit, is like a credit card that’s tied to the value of your home. It allows a person to borrow money using their home as collateral, up to a certain limit. The more equity they have in their home (the difference between what their home is worth and how much they still owe on it), the more they can borrow. Unlike a traditional loan where they get all the money at once, with a HELOC, they can take out money as needed, repay it, and borrow again, much like a revolving credit line or even a credit card.
Who benefits most from a HELOC?
People who benefit most from a HELOC are homeowners with significant home equity and those needing flexible borrowing options for large expenses. It’s particularly useful for individuals looking to finance home improvements, consolidate debt, or manage unexpected expenses.
Who Benefits Most | Why They Can Benefit |
---|---|
Homeowners with high equity | They can borrow a larger amount against their home’s value. |
People financing home renovations | HELOCs offer a cost-effective way to fund large improvement projects. |
Those consolidating debt | HELOCs often have lower interest rates than credit cards or personal loans. |
Individuals managing unexpected expenses | They can access funds as needed, providing financial flexibility in emergencies. |
People planning large purchases | A HELOC provides a flexible line of credit for bigger purchases without upfront borrowing. |
When should you avoid a HELOC?
A person should avoid paying for a HELOC if their income isn’t stable or if they’re already stretching their budget. Since HELOC uses their home as collateral, missing payments could risk losing their home. Plus, if interest rates go up, the payments can get more expensive, making it harder to keep up.
For example, if someone has a job with uncertain hours or income, like freelance work, taking out a HELOC could become a big problem if their income drops unexpectedly. It’s better to wait until their finances are more reliable before using this type of loan.
HELOC vs. other loans
When considering borrowing options, it’s best to compare HELOCs against other types of loans so that you really know if a HELOC is what you need or want. Here’s a quick overview:
HELOC vs. Home Equity Loan
A HELOC is like a credit card: you borrow against your home’s equity and pay interest only on what you use. In contrast, a home equity loan provides a lump sum with fixed payments over time. If you need funds for ongoing expenses like a home renovation, a HELOC’s flexibility makes it a more suitable option. However, if you prefer fixed payments and a set schedule, a home equity loan may be a better fit if you prefer fixed payments and a set schedule
HELOC vs. Cash-Out Refinance
A cash-out refinance allows you to replace your existing mortgage with a new, larger loan, and pocket the difference in cash. While both a HELOC and a cash-out refinance let you access your home’s equity, a HELOC keeps your existing mortgage intact. In contrast, cash-out refinancing makes sense if you want to lock in a low fixed rate for both your mortgage and the additional cash.
How to find the best HELOC lenders
Finding the right Home Equity Line of Credit (HELOC) lender is all about understanding your wants and needs, evaluating lenders carefully, and being aware of all potential costs. This is important to note because just like with any debt product, there will be fees across the board that you might not be familiar with. Here’s a straightforward step-by-step guide to finding the best HELOC lender without the financial jargon.
Step 1: Know what you need to use the HELOC for
Before diving into the search for lenders, get a clear idea of what you need a HELOC for. Are you looking to renovate your kitchen, pay off some high-interest debt, or just have an emergency line of credit available? Knowing your “why” will help you decide on the type of HELOC that works best for you and how much you need to borrow.
For instance, say you want to add a new deck so that you can host barbecues in your home and would like to start as soon as possible. A HELOC is great for home improvement because it allows you to borrow money as you need it, rather than taking a lump sum upfront like with other loans. That way, you’re only paying interest on what you actually use, rather than paying interest on a whole lump sum and trying to find a place to put the money that you aren’t utilizing.
Step 2: Shop around for the best HELOC rates
A HELOC typically has a variable interest rate, which means it can go up or down depending on the market. Look for a lender that offers a competitive rate. Even a small difference in interest rates can save you a lot of money over the life of the HELOC.
How to shop around for rates
- Compare Introductory Rates and Long-Term Rates: Some lenders offer low introductory rates, but the rate can go up after a set period. Understand what happens to the rate after that “honeymoon period”, which is a period in which the rate is fixed or a time at a low rate, with the idea of upping it after a while.
- Look at Fixed-Rate Options: Some lenders let you convert your HELOC balance to a fixed-rate loan, which is helpful if you want predictable payments and interest rates.
Imagine you’re shopping around for a HELOC, and you come across two lenders offering different deals. Lender A is advertising a super attractive introductory rate of 3.5% for the first year. That sounds great, right? But there’s a catch—after the first year, that rate jumps up to 5%.
Now let’s look at Lender B. They offer a steady rate of 4.25% for the entire duration of your loan. At first glance, Lender A looks like the better deal with that low 3.5% rate upfront. But remember, that lower rate is only temporary, and after the first year, you’ll be paying 5%, which is higher than what Lender B is offering.
So, which one is better? Well, it depends. If you only plan to use the HELOC for a short time and pay it off quickly, that lower rate with Lender A might save you money. But if you think you’ll be borrowing for a while, the steady, predictable rate from Lender B could end up being cheaper in the long run. It’s all about running the numbers and figuring out what works best for your situation
Step 3: Be aware of fees, including those in the fine print
While some lenders boast “no fees,” it’s important to look at all potential charges that may only exist in the fine print. Here are some common fees to be aware of:
Fee Type | Description | Cost Range |
---|---|---|
Application Fees | A one-time cost for applying. | $0 – $500 |
Appraisal Fees | To determine your home’s value. | $300 – $700 |
Annual Fees | A charge to keep your HELOC open. | $50 – $75 per year |
Prepayment Penalty | A fee for paying off your HELOC early. | $0 – Several hundred dollars (varies by lender) |
For example, Lender A might charge a $300 application fee and a $100 annual fee, while Lender B waives these fees entirely. Over time, those fees add up, so make sure you take them into account when comparing lenders.
Step 4: Look for flexible HELOC terms
One of the best things about a HELOC is that it gives you flexibility in how you borrow and repay. However some lenders are more flexible than others. Here’s what to look for:
- Draw Period and Repayment Period: Most HELOCs have a draw period (typically 5-10 years) when you can borrow money, followed by a repayment period (10-20 years). Choose a lender that offers enough time for both borrowing and repayment to fit your needs.
- Interest-Only Payments: Some lenders let you make interest-only payments during the draw period, which can be helpful if you want to keep payments low while you borrow.
Let’s say Lender A charges a $400 application fee and $75 each year to keep your HELOC open, but Lender B skips the application fee and only charges $50 a year. Those smaller fees may not seem like much at first, but they can add up quickly, so it’s worth comparing them before making your choice.
Step 5: Check your credit and LTV ratio
Your credit score and Loan-to-Value (LTV) ratio (how much you owe on your mortgage compared to your home’s value) play a significant role in your eligibility and rates. The higher your credit score and the lower your LTV, the better rates you’ll likely get.
How to Do It:
- Improve Your Credit Score Before Applying: Pay down debt, avoid missed payments, and check your credit report for errors.
- Know Your Home’s Equity: Lenders typically allow you to borrow up to 85% of your home’s equity, but lower LTV ratios can mean better rates.
If your home is worth $300,000 and you owe $150,000 on your mortgage, your equity is $150,000, and your LTV ratio is 50%. With a solid credit score and a lower LTV ratio, you’re in a great position to get favorable HELOC terms.
Step 6: Compare customer service and online access
Choose a lender that provides great customer service and convenient online access. This is crucial for managing your HELOC efficiently and quickly accessing funds when you need them. Look for a lender that offers solid online and mobile access—having robust tools makes it easy to manage your HELOC, transfer funds, and make payments anytime. Good customer support is also key; check reviews to see if they help customers quickly and clearly. A lender with a user-friendly app and 24/7 support can make handling your HELOC hassle-free, which is crucial if you need to access funds quickly for something like an emergency repair.
Step 7: Review lender reputation and reviews
Take some time to read online reviews or ask for recommendations from friends or family who have experience with HELOCs. A lender’s reputation for transparency, honesty, and customer service can make all the difference.
At the end of the day, the best HELOC needs to fit your own situation
In the simplest of terms, a HELOC can be a great way for homeowners to borrow money when they need it, especially for things like home improvements or paying off high-interest debt. It’s flexible, and you only pay interest on what you actually use. But, it’s not always the best idea—if your income is unstable or you’re already struggling with bills, or maybe a home equity loan or credit card might fit your situation better.
If you are looking for something that fits pretty much everyone with cash flow and real estate, you should consider a cost segregation study, which can be found here.
FAQ
Can I use a HELOC for non-home-related expenses?
Yes, a HELOC can be used for various expenses beyond home improvements, such as paying off high-interest debt, funding a child’s education, or covering emergency expenses. However, using a HELOC for purposes other than home improvement may affect the tax deductibility of the interest, so consult a tax advisor.
What happens to my HELOC if property values decline?
If your home’s value drops significantly, your lender may reduce your HELOC credit limit or freeze access to funds to minimize their risk. This is more common in volatile markets, so it’s important to be aware that property value changes can affect your borrowing capacity.
Can I refinance my HELOC?
Yes, you can refinance your HELOC. Many borrowers choose to do so when the draw period ends and payments increase, or if they want to secure a better interest rate. However, refinancing comes with its own set of fees and terms, so weigh the costs and benefits carefully.