A home equity line of credit features an interest-only ‘draw’ period where you pay interest only. But after the draw period is over, you need to pay principal and interest. The fact that HELOC loan payments usually rise substantially with a HELOC line of credit can make them riskier for some borrowers. Most lenders offer a 10-year draw period for home equity lines of credit, but that amount is not set in stone. It is imperative that you understand the HELOC repayment period before you commit to adding a second mortgage lien to your property.

In most cases the HELOC credit limit ranges from $10,000 to $1,000,000 depending upon the bank, credit score and of course your loan to value. Some HELOC lenders will have a minimum HELOC draw amount when your home equity line of credit account gets set up. The HELOC credit limit is set up ahead of time before your HELOC account closes escrow.

What is a Home Equity Line of Credit or HELOC?

A Home Equity Line of Credit, commonly known as a HELOC loan , functions as a secondary mortgage that provides you with access to funds based on your home’s value. (It can also serve as the primary mortgage if your home is fully owned.) This financial tool allows you to borrow against your equity, calculated as the home’s value minus the outstanding amount on your primary mortgage. Generally, lenders permit borrowers to access up to 85% of their equity, although this percentage can vary.

Utilizing a HELOC line of credit involves the ability to withdraw from the line of credit and make monthly repayments, resembling the structure of a credit card. It’s important to note, however, that HELOC funds are not designed for trivial expenses and should be used judiciously.

When exploring loan options, leveraging the equity in your home often results in securing the most favorable HELOC interest rates. This approach proves advantageous for borrowers seeking cost-effective financing solutions.

Differences between a Home Equity Line of Credit and a Home Equity Loan

Homeownership often brings with it opportunities to leverage the equity built in a property for various financial needs. Two popular options for tapping into this equity are Home Equity Lines of Credit (HELOCs) and Home Equity Loans. While both fall under the umbrella of second mortgages, it is crucial to comprehend their differences before choosing the financing option that best aligns with your financial goals. Is a a HELOC a 2nd mortgage?

In some cases the HELOC closing costs and fees are less than fixed equity loans, but you need to verify that with each lender. Also, learn about the differences between a cash out refinance and HELOC.

Understanding Home Equity Line of Credit (HELOC):

A HELOC loan provides a flexible approach to accessing funds. Unlike a fixed equity loan, which disburses a lump sum upfront, a HELOC establishes a credit line from which homeowners can borrow as needed within a specified timeframe. This flexibility allows borrowers to access funds incrementally, paying interest only on the amount utilized. Understanding HELOC eligibility parameters and the repayment period structure is crucial.

Key Features of HELOC Loan:

Flexibility in Borrowing: HELOC accounts permit borrowers to borrow what they need when they need it, providing adaptability to address changing financial needs.

Incremental Repayment: Repayment for a HELOC funds is based on the amount borrowed, akin to a credit card, rather than the total loan amount. Borrowers can pay back and reuse the credit line during the draw period.

Variable Interest Rates: HELOCs often feature variable interest rates, meaning the rate may fluctuate during the loan term. Initial discounted HELOC rates may be offered, but they can increase after an introductory period.

Understanding Home Equity Loan:

In contrast, a Home Equity Loan disburses a one-time lump sum at the loan’s inception. The borrower then repays the loan over a fixed term with a fixed interest rate. This structure provides predictability in monthly payments, making it an appealing option for those seeking stability in their financial planning.

Key Features of Home Equity Loan:

Lump Sum Disbursement: Home Equity Loans provide a single, upfront disbursement of funds, making it suitable for those with a specific financial goal in mind.

Fixed Repayment Schedule: Borrowers repay an equity loan with regular, fixed monthly payments, facilitating budgeting and financial planning.

Fixed Interest Rates: Home Equity Loans typically come with fixed interest rates, ensuring that monthly payments remain consistent throughout the loan term.

Choosing Between HELOC vs Home Equity Loan:

The decision between a HELOC and a Home Equity Loan hinges on individual financial objectives and preferences. If flexibility in borrowing and repayment aligns with your needs, a HELOC may be the ideal choice. However, if stability and predictability are paramount, a fixed rate home equity loan might better suit your requirements.

Navigating the landscape of home equity financing involves understanding the nuances between a Home Equity Line of Credit and a Home Equity Loan. Whether opting for flexibility with a HELOC account or stability with a fixed 2nd mortgage, homeowners can strategically leverage their property’s equity to meet various financial objectives. Careful consideration of personal financial goals and preferences is essential in making an informed decision that aligns with both short-term needs and long-term financial well-being. 

In most cases there is a significant advantage to setting up a HELOC account rather than a personal loan. The unsecured personal loans typically have higher interest rates but are popular with borrowers that want less than $10,000.

Remember that the interest only HELOC payments are allowed for the draw period. So, if you have a $50,000 HELOC credit limit and you take out $30,000, then after 120 months you won’t be able to make interest only payments anymore. At that point the repayment period begins and you will start paying a principal and interest payments paying back the $30,000 you borrowed. 

HELOC Advantages

• Access funds multiple times without the need to submit a new loan application.
• Borrow the precise amount you require, precisely when you need it, and solely repay that sum along with interest.
• Possibility to deduct interest on eligible HELOCs utilized for home improvements (It’s advisable to seek advice from a tax professional).
• Provide flexibility in repayment, including the ability to convert a portion of your balance to a fixed rate.

HELOC Disadvantages

• Loan repayments and interest expenses can vary.
• Having access to a credit line may entice some individuals to overspend.
• Failure to make payments could result in the loss of your home as it serves as collateral for the line of credit.

Get up to speed on the lending requirements for home equity loans and HELOCs. 

Reverse Mortgage Versus HELOC

Through a reverse-mortgage, you obtain an advance on your home equity, and repayment is deferred until you vacate the residence. Nevertheless, this arrangement is commonly associated with numerous fees, and interest on the received funds accrues continuously at variable rates. Reverse mortgages are typically exclusive to older homeowners, with eligibility starting at 62 years for the widely used Home Equity Conversion Mortgage (HECM) and as early as 55 for certain proprietary reverse mortgages. Also consider a home equity investment prior to committing to an HECM.

Cash Out Refinancing Versus HELOC

A cash-out refinance involves the substitution of your existing home mortgage with a larger loan, and the surplus amount between the original mortgage and the new loan is provided to you as a lump sum. The primary distinction between a cash out refinance and HELOCs lie in the fact that cash-back refinancing necessitates the replacement of your existing mortgage, whereas a HELOC loan keeps your current mortgage unchanged, albeit introducing an extra financial obligation to your portfolio. Borrowers love home equity loans to get cash back, whether they are choosing a credit line or a refinance option.

What Is the HELOC Program?

In 2024, interest rates are still high, and homeowners may wonder about how to get the money they need at the lowest cost. For many homeowners, doing a cash-out refinance of their first mortgage doesn’t make sense. If you got your mortgage in 2020 or 2021, you could have a rate of 3% or lower, so getting a new mortgage at 7% or 8% doesn’t make sense in 2024. So, what are you to do?

Many people who own a home and want cash may turn to a home equity line of credit or HELOC to get low-interest cash. You can learn all the details about the HELOC program is below. If you have questions about your options or want to apply, speak to one of our loan officers today.

How Does the HELOC Work?

A home equity line of credit is a variable-rate second mortgage that uses part of a home’s value with a revolving line of credit. The line of credit you receive is based on the amount of equity in the home. A HELOC differs from a home equity loan because you only pay interest on money that you take out. A home equity loan gives you a lump amount of cash that you pay interest on right away. The HELOC interest only payment option provides borrowers with increased cash flow that can be useful when remodeling a home. 

The home is the collateral for the HELOC, so the interest rate is usually better than unsecured credit cards. HELOCs come with a draw period of five or 10 years, and a payment period. During the draw period, you will probably only pay interest. After the draw period ends, you pay interest and principal. You can use a HELOC line of credit over and over; once you pay off the credit line, you can reuse it, similar to a credit card.

Why Do People Get HELOCs?

HELOCs have a lower interest rate than credit cards, and with higher interest rates, doing a cash-out refinance doesn’t make a lot of sense for many homeowners. So, they are turning to HELOCs in 2024 for the following reasons:

• Paying off credit cards: Anyone with credit card debt in 2024 knows that interest rates have soared in the past two years. Many people are paying over 20% on their credit card debt. Taking out a HELOC and paying off that debt could cut your rate by half or more.
• Paying for a college education: If there is someone in your home who wants to further their college education, taking out a HELOC is a good way to do it.
• Taking a vacation: Many people like to use a HELOC to pay for a once-in-a-lifetime vacation, such as a summer in Europe or a trip to the Galapagos Islands. Remember, you only pay interest on the money you take out of your HELOC loan. You also can pay the money back and reuse the credit line for other things.
• Paying for medical bills: Most Americans know that health care here can be expensive. As people get older, they usually need more medical care. You can use your HELOC funds to pay off large healthcare bills.
• Starting a new business: Working for yourself is part of the American dream. But starting a new business often requires money. You can take out 80% to 90% of your home’s value (including the amount of your first mortgage) and use the money to start your own company.
• Buying real estate: Many Americans like to buy rental real estate to give them extra income. You can use some of your HELOC money to make down payments on rental properties.
• Setting up an emergency fund: You may not have the money to replace your air conditioner or roof. But with a HELOC account, you can get the money needed for home repairs at an affordable interest rate.
• Renovating your home: One of the most popular ways to use a HELOC in 2024 is to pay for home renovations. Home values have held steady in recent years, and improving the home can increase your home’s value. Whether you want to redo your kitchen or add a family room extension, a HELOC can give you all the money you need to improve your home.

You can do just about anything you want with your HELOC money. If you have plenty of home equity and need a large amount of cash, a home equity line of credit could be your best option. Before you apply, though, you may wonder about where interest rates are heading.

Will HELOC Rates Decrease In 2024?

The Fed has raised interest rates 11 times since 2022, so mortgage and credit card rates are have soared. The average first mortgage rate is about 7% today, and average credit card rates are sky-high at 21%. However, the Fed has indicated in recent months that inflation has dropped and it won’t be as aggressive in raising rates in the near future.

What does this mean for HELOC interest rates? Today, the average HELOC rate is 9% or 10%. While this is higher than three years ago, it’s still a relatively good deal for homeowners looking for lower-interest cash to pay for medical bills, credit card debt, or home improvements.

Many people believe that best HELOC rates will decline in 2024, as will rates in general. There are several reasons why HELOC interest rates could drop this year:

Inflation Is Dropping
Inflation rate data from the end of 2023 shows that prices were up 3.2% as of October. That was a decrease from 3.7% in September 2023, so the inflation rate is starting to go down, which suggests that the Fed’s interest rates hikes have been effective. However, the Fed wants to see inflation in the 2% range, so we are not there yet. If inflation continues to slowly decline, there could even be a cut in interest rates this year, which could benefit HELOC rates.

Job Growth Has Dropped
Inflation is a key measure of economic health, but not the only one. Job growth is another way to check if the economy is doing well. After all, if people are spending money and there is a lot of inflation, companies must hire more workers to keep pace with consumer demand. As economic activity slows, there is usually an increase in unemployment.

There isn’t a sign of a rapid slow down in jobs, but we are seeing signs in early 2024 that hiring is slowing. The Bureau of Labor Statistics shows that unemployed Americans have increased by 850,000 since last April. If this continues, it could give the Fed another reason to drop interest rates, which could benefit mortgage rates.

But, You Shouldn’t Wait To Get A HELOC
It’s true that HELOC rates today are higher at around 9% than they were three years ago. It’s also possible that rates could drop in the future, but that doesn’t mean you should wait to get a HELOC. The reason is that most home equity lines of credit have variable rates. So, when interest rates drop, the rate on your loan will, too.

Plus, if you want to get a HELOC to pay off credit cards or renovate your home, you probably don’t want to wait. If you delay paying off your debt, it will only increase your financial difficulties.

HELOC Highlights
Getting a HELOC is a smart move for many homeowners in 2024. The rate on HELOCs is far below the average credit card rate of 21%. It’s possible that rates could decline this year, but so will the variable rate on your loan. So, if you get a HELOC soon, you can get the cash you need at a lower rate. Talk to a loan professional today to find out if a HELOC is a smart move for you. They can tell you the amount of money you could qualify for and at what rate, based on your home value and credit profile.