What Can You Use A HELOC For?
A Home Equity Line of Credit (HELOC) is a type of loan that is granted by a lender and uses your home as collateral. The amount of the loan a homeowner can qualify for is largely based on the amount of equity in the home. All home equity lines of credit come with a credit limit and start with a variable interest rate.
Get Started on Your Home Equity Line of Credit (HELOC)
The HELOC is very popular with homeowners because it has a lower interest rate than credit cards. And you can use the money any way you’d like! Some of the best ways to use a HELOC include making home improvements, paying for college, consolidating high-interest debt, paying for higher education tuition, starting a business, and much more.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easier.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
Read on to learn more about how to use a HELOC!
What Is A HELOC?
A Home Equity Line of Credit (HELOC) is a type of “revolving” credit that you can draw from and repay monthly, thus replenishing the credit line.
Credit cards are another type of revolving credit, but they come with high interest rates that can make them costly when large amounts of money are needed.
A HELOC typically has a lower interest rate than credit cards and can be used for any type of purchase.
A HEOC is a “secured loan,” meaning that lenders require that the borrower put up security or collateral (in this case the borrower’s home) to secure the loan. Because your home is used as collateral, if you default on the loan, the lender can take possession of your home.
To learn more read, “What is a HELOC?
HELOC Refinance Eligibility Requirements
Home equity lines of credit are offered by credit unions, banks, mortgage companies, and online lenders. Here are some typical eligibility requirements:
Equity In Home. Equity is the amount of the home you own. A homeowner who doesn’t have a mortgage loan has 100% equity in their home. If you have a mortgage, you can calculate your equity by subtracting the mortgage amount from the appraised or market value amount. For example: Appraised value $600,000 – Amount owed on mortgage $250,000 = $350,000 Equity. Divide the equity ($350,000) by the home value ($600,000), which is 58% equity. Most lenders require 15-20% equity for a HELOC.
Home Value. Some lenders will require you to get a new appraisal on your home in order to determine the home’s value. The lender will use the appraised value in calculating Loan-to-Value (LTV).
Loan-to-Value (LTV). LTV in a HELOC application refers to a comparison of your mortgage loan balance and the current appraised value of your home. Some lenders will get this ratio based on Combined Loan-to-Value (CLTV) by combining the amount owed on the mortgage and the desired HELOC amount to come up with the borrowers total debt. Credit unions and banks will generally lend up to 85% LTV.
Debt-To-Income (DTI) Ratio. DTI is your total monthly expenses divided by your total monthly income before taxes. Lenders want to know if you’ll have the funds to repay the HELOC.
Credit History. FICO®
uses information in your credit reports and your credit history to generate your credit score. Changes in your report information or score can affect the loan amount and rate you are offered by a lender.
For more details, read "HELOC Eligibility Requirements
HELOC vs. Home Equity Loan vs. Cash-Out Refinance
The most distinguishing characteristic of a HELOC is that it is a line of credit. A line of credit allows you to draw from it any amount you need. You’ll pay interest only on the amount you borrow, not on the full credit line. Interest is paid at a variable rate during a draw period of typically 10 years. After that, the interest rate may adjust to a fixed rate and monthly payments will then include both principal and interest on the outstanding balance.
Home Equity Loan:
A home equity loan differs from a HELOC in how the funds are disbursed and the interest rate. A home equity loan provides funds in a lump sum and the interest rate is fixed. Like a HELOC, the amount of the loan given by a lender is based on the borrower’s home equity, LVT, DTI, and credit score. Often referred to as a “second mortgage,” a home equity loan is a big financial responsibility. Monthly loan payments will include both principal and interest, whether you actually use the funds or not.
With mortgage interest rates very low, refinancing your current mortgage to a new mortgage at a lower interest rate could help you lower your monthly payments. Getting cash-out on a refinanced mortgage means borrowing more than what you owe on your current mortgage, paying off that loan, and getting a cash disbursement of the extra funds at closing. You can use your cash-out any way you choose.
Learn more by reading "HELOC vs. Home Equity Loan
” and Cash-out Refinance vs. Home Equity Loan
8 Best Ways To Use Your HELOC
Can you use a HELOC for anything? Yes, and here are some of the best ways to use a HELOC:
Having money available through your home’s equity can help you increase the value of your home by using the funds to make improvements such as updating a kitchen and bathroom, installing new windows, and more.
You can use your HELOC to get the degree you always wanted.
Credit card debt can cost you thousands of dollars each year in interest payments. Using your HELOC funds to pay off credit cards can be a smart move.
Having access to quick cash can come in handy if or when the unexpected happens, such as a medical emergency, auto breakdown, a loved one’s funeral, or damage to your home that insurance may not cover.
Some people use a HELOC to put money down on an investment property or second home.
Wedding expenses can really add up, and having extra cash on-hand can pay for the big expenses and all those little extras that help make the occasion special.
Business owners can use a HELOC to pay for new equipment and supplies, and other expenses that come up.
Pay For A Vacation:
While it’s tempting to use a HELOC to pay for a vacation, this isn’t the best use of the funds. Because you’ll pay interest on any amount you spend, that vacation may end up costing you more in the long run. If possible, it’s better to save up for a vacation than use a loan to fund it.
Is Getting A HELOC A Good Idea?
A HELOC can be a great way to access the full value of your home to get the money you need, and there are an unlimited number of HELOC Uses.
However, there are caveats to consider, like the variable interest rate (which means unpredictable monthly payments on the amount you owe).
If you need of money and are trying to decide between using your credit card or a HELOC to make a high-cost purchase that won’t be paid off right away, a HELOC will likely save you money on interest, even with its variable rate.
Although HELOCs can provide you with a significant amount of money to use as you please, it’s important to be sure you have the financial means to make monthly payments on two loans. After the HELOC draw period ends, principal and interest will be combined into one monthly payment at a fixed interest rate.
When is it a good idea to open a HELOC? For homeowners with at least a 660 credit score, steady income, and the right amount of home equity, a HELOC can be a great option for accessing the cash you need.
What You'll Need To Apply
Applying for a HELOC is really pretty easy. You’ll need to provide the lender with:
This typically includes two forms of government-issued identification.
Employment and Income Information:
Lenders will ask for your most recent W2s or 1099s (if you are self-employed), pay stubs, and other statements that show you have money coming in and will be able to pay back the loan.
Be prepared to show your most recent mortgage statement.
This will include the address of the subject property. A property appraisal will likely be required.
Information on Outstanding Debts:
The lender will ask for statements for any outstanding loans you may have, including auto loans, student loans, and other debt.
CU SoCal HELOC
CU SoCal offers an interest-only HELOC, so you pay only the interest due each month, giving you the flexibility to keep payments low during the 10-year draw period of your loan. We offer the choice of either a lump-sum loan or a revolving credit line that can be used over and over again.
Other great HELOC features include:
- Access up to 80% of your home's equity.
- No points.
- No appraisal fees for single unit loans.
- No annual fee.
- No closing costs.
- Loan limit up to $250,000.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Apply for a HELOC today!
Get Started on Your Home Equity Line of Credit (HELOC)