If you're thinking of starting a large home renovation project or consolidating your debt, a home equity line of credit, or HELOC, is a great option. Still, it helps to understand how to apply for a HELOC and how to best manage your payments before you make a final decision on whether it's the right fit for you.
Let's take a look at the step-by-step process of using and repaying a HELOC - starting with where the funds come from.
Source Funds from Your Home Equity
A HELOC is a way to borrow money against the equity that you've built up in your home1 - that is, the value of your home minus how much you still owe. The more you owe on your home relative to the overall value of the home, the less you can borrow with a HELOC. That is to say, if you still owe 70 percent of the value of your home, you'll be able to borrow less than someone who only owes 20 percent of their home's value.
Use Your HELOC as a Line of Credit
A HELOC is a revolving line of credit for a wide range of projects and investments. Some opt to use their HELOC for home renovation, while others choose to make a large purchase. If you're interested in consolidating your debt under a lower interest rate, a HELOC might be a good option for you.
Take out as Little or as Much as You Need
A HELOC is different from most loans. It doesn't involve a single, large disbursement of money. Instead, it opens up access to a capped amount of borrowable funds. You can borrow2 and repay up to your credit limit, much in the same way as a credit card works.
Opt to Take a Fixed-Rate Advance
Have a larger project or set amount of funds you want to withdraw? You can "fix" the interest rate on it, locking in the rate3. This is done once your HELOC is funded. Having a static rate on a large sum offers peace of mind on the interest rate you pay in the long term.
Let's say you want to use $25,000 to consolidate debt and to upgrade your bathroom. Instead of drawing the money from your home equity and then repaying the funds back at varying rates, you can request a fixed-rate advance.
Up to three fixed-rate advances (of $5,000 or more) can be open at the same time, and choosing this option sets both a fixed payment amount (which includes principal and interest) and a rate that won't change even if the prime rate adjusts. HELOC rates could go up the very next day, but the interest on your fixed-rate advance remains unchanged!
Withdraw for 10 Years, Repay for Another 15 Years
You can withdraw funds at any time with a minimum of $100 (up to limit of your line of credit) during the draw period. You can make payments on just the loan's interest during the 10-year draw period (with a minimum payment of at least $100), rather than paying on both principal and interest. However, homeowners who make payments toward the principal throughout their draw period find that they owe much less by the time the 10-year draw period ends, and their 15-year repayment period begins.
If you're a homeowner who would like to learn more about HELOCs, we're here to help. Discover your options by visiting any BECU location or calling 800-233-2328. You can also make an appointment with a member consultant to have all your questions answered in person.
1You must open and maintain BECU membership with a Member Share or Member Advantage savings account; not all applicants will qualify. Financing is subject to credit approval and other underwriting criteria. The specific credit limit will be determined based on information obtained while processing your application, which includes, but is not limited to: your credit report, your income, occupancy, and available equity in your home; not all applicants will qualify. BECU must be able to perfect a first or second mortgage lien on your one-to-four family residence. During the credit advance draw period, payments equal monthly payments of interest, subject to the lesser of $100 or your balance and the principal is not reduced. At the end of the draw period, your monthly payments will increase equal to the principal and interest amount necessary to pay the loan balance over the remainder of the loan term amortized over 180 months. Insurance to protect the property against hazards (including flood insurance, if applicable) is required. Borrower is also required to pay for optional services (e.g. if borrower retains an attorney that borrower is not required to use). Certain third party costs may apply that range between $0-$1,999, depending on the location of the property, the amount of the loan, and other factors. Additional state or local mortgage fees or taxes may apply. A reconveyance fee is charged to remove BECU from the property's title when a HELOC is paid off and closed. Reconveyance fees are paid to prepare and record the Reconveyance with the county in which the property is located and varies by county. Reconveyance fees are not BECU fees and are not waivable. Loan programs, terms, and conditions are subject to change without notice. An Automated Value Model (AVM) may be obtained in lieu of an appraisal at no cost to applicant. In South Carolina, where the law requires use of an attorney, BECU will be solely responsible for paying all attorneys' fees and costs necessary to open the HELOC, and will perform this responsibility fully by paying all reasonable attorneys' fees and costs related specifically to the closing based on rates typically charged by attorneys in the local market for the closing of similar HELOC transactions.
2Minimum draw amount is $100.
3The rate for a Fixed Rate Advance (FRA) ranges from 4.59% to 9.59% APR effective 11/01/2019. You may convert all or a portion of your outstanding HELOC variable-rate balance to a FRA. The minimum outstanding balance that can be converted into a FRA is $5,000 from a HELOC account. No more than three FRAs may be open at one time. Contact a BECU representative for current information.