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Woman researching what is a HELOC loan

What is a home equity line of credit?

A home equity line of credit (HELOC) uses the equity you’ve built in your home as collateral to get an additional loan. Since you’re using your home as collateral, lending institutions generally are able to offer much more favorable interest rates than you would get from an unsecure borrowing source (like a credit card company).  

Home much money can you get from a HELOC?
Each lending institution has different guidelines that dictate how much they can lend you. Their guidelines are usually based on your loan-to-value ratio (LTV), which is the amount of principal on your mortgage compared to your home’s appraised value. Most often, you’ll need at least 20% equity in your home (which is a LTV of 80%) to qualify. As example, if your home’s current value is $300,000 and the remaining balance on your mortgage is $250,000, you would have an LTV of 83%. For many lending institutions, you would not qualify for a HELOC.  

However, if your home’s current value is $300,000 and the remaining balance on your mortgage is $175,000, your LTV would be 57.9% and you would normally qualify for a HELOC for up to 80% of the equity in your home. In this example, you may have access to $65,000. 

Be aware that many lenders won’t give you a HELOC for less than $25,000.  

How do you get the cash?
Much like a credit card, you’ll have a revolving line of credit available. You can access your funds through an online transfer, a check, or a credit card. As you borrow more from your line of credit, your payments will increase though the rate of interest will remain the same.  

When do you have to pay back your HELOC funds?
Even if you get a HELOC, you don’t have to use the funds. As long as your lender doesn’t require you to do minimum draws, it could be a good source of emergency cash or a temporary safety net. If you do need to use the cash, the interest rates are lower than the rates tied to credit cards. 

The benefits of a HELOC
Even if you get a HELOC, you don’t have to use the funds. As long as your lender doesn’t require you to do minimum draws, it could be a good source of emergency cash or a temporary safety net. If you do need to use the cash, the interest rates are lower than the rates tied to credit cards.

The cons of a HELOC
The rate on your HELOC might fluctuate, and if it goes too high, you may have a hard time paying off your interest. Furthermore, your lender may decide to reduce your line of credit if your home’s value takes a drastic dip. And, don’t forget your overall debt load will increase with a HELOC or any other second mortgage.

Alternatives to a HELCO
One potential alternative is a cash-out refinance, which you could also use to pay for a home renovation or to pay off credit card bills.

>> Learn more about a cash-out refinance.

Is a HELOC right for you?
If you have enough equity built into your home and need cash for a home improvement, to cover medical bills, to pay off credit cards, or to sustain your lifestyle after losing a job, a HELOC might be a great solution. To find your home’s current value and how much you could get from a HELOC, contact your local Mann Mortgage expert today.

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