---------------------------------------------------------------------------------------------------------------------------------------------------- Home Equity Line Of Credit - HELOC
WHAT IS A 'HOME EQUITY LINE OF CREDIT - HELOC'
A home equity line of credit (HELOC) is a line of credit extended to a homeowner that uses the borrower's home as collateral. Borrowers are pre-approved for a certain spending limit, based on household income and credit score, and may draw on this limit at their discretion. Interest is charged at a predetermined variable rate, which is usually based on prevailing prime rates.
Once there is a balance owing on the loan, the homeowner can choose the repayment schedule, as long as minimum interest payments are made monthly. The term of a HELOC can last anywhere from less than five to more than 20 years, at the end of which the entire remaining balance must be paid in full.
You only pay interest on what you actually borrow and there are no closing costs. You may borrow up to $100,000 (($50,000 if you are married filing separately) and deduct the interest from your income taxes.
BREAKING DOWN 'Home Equity Line Of Credit - HELOC'
HELOCs Are Hot Again
When real estate values were surging in the 2000s, it was common for people to borrow against the equity in their residences. That slackened with the bursting of the housing bubble in 2007. But now, many regions of the United States, home values are continuing to rebound, swelling the home equityavailable to
homeowners. In 2015, they drew $156 billion from home equity lines of credit (HELOC), which was the largest dollar amount since the Great Recession. The average HELOC established was a record $119,790.
How Much Can You Borrow?
The loan-to-value ratio for most secondary loans like HELOCs is usually set at 80%, although this can be higher in some instances for those who qualify. LTV is calculated by dividing the remaining loan balance of a mortgage by the present market value of the residence. Suppose you are five years into a 30-year mortgage plan on your home. A recent appraisal places the value of your house at $250,000, and you still have $195,000 left on the original $200,000 note. If there are no other debts registered with the house, you have $55,000 in home equity. Your LTV is 78%.
Basically this means you can borrow up to 80% of the appraised value of your home, minus the amount you still need to pay on your primary mortgage. Of course, the actual amount that is granted depends on the borrower’s financial condition and credit score. There are even some loans that can exceed 100% of the LTV ratio, but most financial planners caution borrowers against this form of loan, as they come with a high possibility of foreclosure, and any interest on a balance that exceeds the home's value cannot be tax-deductible.
Lenders are required to disclose how interest is calculated, the consequences of non-repayment, the terms and interest rate charged by the loan and other pertinent details such as the borrower’s right of rescission.