What is a HELOC
Posted: July 1, 2022
Updated: May 30, 2024
Want to purchase new energy efficient windows to replace your old drafty ones? You might think your only options are to save up or use a credit card to pay for them, but there is another way. Did you know you can use the equity in your home to make repairs, remodel your kitchen or even add a new master bathroom? It’s true! Discover how to tap into your home’s equity with a Home Equity Line of Credit (HELOC) and turn your project plans into action plans. If you’ve heard of a (HELOC), but you’re not exactly sure what it is, how it works or what the process is to get one, we’ve got you covered. Let’s break it down brick by brick so you’re equipped with everything you need to know before applying!
Understanding Equity
First let’s make sure you have a basic understanding of equity. Now, your home’s equity isn’t hidden somewhere in the walls or tucked away in the basement. Equity is the difference between what you owe on your current mortgage and your home’s current market value. The calculation to decide this is called your loan-to-value (LTV) ratio. There are other factors that go into calculating your home’s usable equity, but in its simplest form, if your home’s value is $300,000 and you owe $100,000 on your mortgage you have $200,000 in total equity. When you apply for a HELOC, your personal finance officer can walk you through all of this, and help you crunch the numbers.
What is a HELOC?
You know how a credit card works, right? You have a credit limit, and you can spend as much as you want up to that limit. When you pay down your balance, you can borrow up to your limit again. Similarly, a HELOC is also a revolving line of credit with a variable interest rate. However, it offers a significantly lower interest rate than a credit card because it’s secured by your home. While a HELOC and credit card may seem similar, they have core differences that make them better suited for different scenarios. Continue reading to see what makes a HELOC unique and why it can be a great option.
How do you apply for a HELOC?
Once you’ve made the decision that a HELOC is right for you and your projects, Landmark Credit Union has an easy to complete HELOC application that can be done online, or by scheduling an appointment to speak with a personal financial officer. Choose a branch that is the most convenient for you and schedule an appointment to get started.
You’ve been approved, what now?
After you submit your application, we have knowledgeable loan specialists that will guide you through each step of the process. They will talk you through and gather the information that is needed for each step right away. We will follow up with you if additional information is needed for loan closing. After you’re approved, you will enter the draw period18 and have full access to your line of credit. The minimum payment due is interest only during this time frame. The draw period on a Landmark HELOC can last up to 10 years!18
What can you use HELOC funds for?
HELOC funds are commonly used for home improvements or repairs, consolidating higher interest debt, paying off medical bills, or higher education expenses. For example, you could use your line of credit to renovate a bathroom, upgrade your kitchen appliances or build an addition on your home. A HELOC can especially come in handy when you have an emergency that requires your immediate attention, like a leaky roof, issues with plumbing or HVAC repairs.
When a HELOC comes in handy:
Let’s say you decided to remodel your unfinished basement. You applied for the proper permits and bought the materials to get the job done. So far, the project is well within the budget that you planned for. As you get farther along, you discover a major issue with the plumbing and now you need to make emergency repairs before you can continue. With other conventional loans you may have to make sacrifices with your remaining budget or apply for more funds to make pay for the repairs. With a HELOC you will have an open line of credit to draw from during your project. That way if you run into an issue like this you can draw additional funds up to your approved limit as needed.
What are some benefits of opening a HELOC?
Flexible: Instead of getting one lump sum like you would with a conventional loan, you can borrow (draw) money as needed for 10 years at Landmark18 (terms may vary at other financial institutions). You’ll only owe on what you’ve borrowed and will have 15 additional years after the draw period to repay the balance at Landmark. Lower interest rates: Unlike other loans and lines of credit, such as a credit card or a personal loan, a HELOC will have a lower rate because you’re using your home as collateral. Interest may be tax deductible: If you use your HELOC funds for home improvement, you may be able to deduct the interest paid on your taxes.1 Early payments: If you’ve completed your project plans before entering the repayment period, you do have the freedom to start paying down your current balance early on.
What makes a HELOC so popular?
A HELOC has a lot of versatility. With a 10-year18 draw period on a Landmark HELOC our members have the time and control to use their funds if and when they are needed. They also have flexibility in how they want to pay their borrowed money back. Plus, with rates as low as Prime minus 1.00% APR18, it can be a smart financial tool for any number of projects or expenses.
Best Practices
Here are some quick tips and or best practices to follow when using your HELOC.
- Do your research and double check your financial situation. Chat with one of our experts and understand the minimum funds you need, calculations of your LTV and requirements to obtain a specific rate.
- A HELOC can be used to pay for more than just home repairs or renovations. Think about other large expenses you may have to pay for that would usually incur debt or a payment plan. Something like a down payment for a wedding venue or dental surgery could easily be paid for with your HELOC funds.
- Keep in mind you only need to pay on the interest portion during the draw period and payments on the principal balance are optional during this time.18
How can I access my funds?
If you open a HELOC with Landmark, you have several options to access your funds, including:
- Digital Banking: Log in to Digital Banking and transfer funds from your HELOC to a Landmark savings, checking or money market account.
- Phone Banking: Use Phone Banking to transfer funds from your HELOC to a Landmark savings, checking or money market account.
- Branch: Visit any Landmark branch to withdraw money from your HELOC.
If you have any confusion about accessing your funds, you can always set up a meeting with a personal financial officer in your local branch or talk over the phone with our helpful phone banking team. They will lay out all the options available to you and make it easy to understand. Remember, you can borrow up to the limit you were approved for when you closed on your HELOC.
Understanding HELOC rates
At Landmark, HELOC rates are tied to the Prime Rate index. This rate is derived from the federal funds rate which is determined by the Federal Reserve. Each financial institution adds a margin to the index to determine the rate for a HELOC. For example, some may offer a rate of Prime plus 1.00%, or Prime minus 0.50%. Landmark is currently offering a great option with a standard rate of Prime minus 1.00% APR18. Check out some other common questions regarding HELOC rates.
Common Questions on Rates
Q) Do you pay interest on a HELOC?
A) Yes, the minimum monthly payment on a HELOC during the draw period18 is the interest charged for the cycle or month. You can always pay a higher amount than the minimum interest, this would then be applied to the principal balance. After the 10-year18 draw period ends, you will enter the repayment period. At this point you will have 15 years to pay on the principal and interest of your remaining funds.
Q) Are HELOC rates fixed?
A) No, HELOC rates are variable interest rates based on the Prime Rate index.
Q) Can you refinance a HELOC?
A) Yes, but be aware of early termination fees that may apply on your existing HELOC. Talk with your personal finance officer about the steps involved for refinancing.
The Bottom Line
If you need access to a larger sum of funds but don’t want to rack up your credit card bill, a HELOC may be the right answer for you. It is a fantastic tool for home renovations, debt consolidation, education or medical expenses and more. Knowing the pros and cons of a HELOC can save you a lot of time and money in the long run. Find out what it means to tap into your equity by talking to an expert!
Think a HELOC might help you accomplish your goals? See our rates or apply online today!