A time may come when homeowners consider embarking on a home improvement project that outstrips their current financial resources. This could range from employing a contractor to build a dream kitchen, or simply replacing an old roof. What remains pivotal is the particular loan product chosen to finance these endeavours: should one opt for a home equity loan or a HELOC?
Commonly, homeowners' first inclination is to secure a home equity loan, which essentially serves as a second mortgage on the home. Upon approval, lenders deliver the total loan amount in a lump sum. Following this, homeowners are committed to making two monthly mortgage payments over a span of 10 to 15 years on average.
However, an increasingly popular alternative among discerning borrowers is the HELOC. This option differs considerably from conventional home equity loans. With a HELOC, approved borrowers are given a line of credit that may even come with a debit card for handling renovation or repair costs. Instead of making monthly payments on the total borrowed sum, payments are made solely on the actual funds expended to date. This makes HELOCs akin to credit cards, presenting a practical method of borrowing.
Key Details about HELOCs with CrossCountry Mortgage
While HELOCs offer simplicity in fund accessibility and require payments only on amounts drawn, they exhibit several differences from traditional home equity loans that warrant attention:
Fluctuating Rates: Some lenders may provide low introductory rates that may escalate significantly over time. It's essential to consider HELOCs with variable rates and understand their potential increases.
Period Terms: Certain HELOC products permit fund withdrawals for a predetermined duration. Once this period concludes, lenders typically expect repayment. The line of credit usually has a fixed time limit for complete repayment.
Balloon Payments: Some products allow for repayment with interest for up to ten years. After this period, a final balloon payment is due, which may prompt borrowers to refinance.
Many homeowners are particularly interested in understanding their borrowing limits.
Borrowing Limits with HELOCs
A majority of HELOC products employ a formula to determine the maximum borrowing limit. A typical value can be upwards of 80 percent of the home's appraised value, after accounting for your existing mortgage. In some cases, lenders may approve up to 100 percent or even 125 percent of the appraised value*. However, this can be a high-risk choice, potentially leading to homeowners owing more than the actual worth of their homes.
For homeowners planning upgrades or repairs, HELOCs offer considerable benefits. Lenders offer a range of products with diverse rates, fees, and payment options. Thus, it can be advantageous to shop around to choose the best HELOC suited to your objectives and financial circumstances.
Navigating the HELOC Application Process with CrossCountry Mortgage
Having gained an understanding of the fundamentals of a HELOC, the next phase involves proceeding with the detailed application process. While procedures can differ across lenders**, the following step-by-step guideline is generally applicable:
Review Your Credit Records: Check your current credit records and score, which you can do for free. Lenders typically favour applicants with a credit score of 620 or higher, though some HELOCs may be available to homeowners with scores in the 500s. Aim to resolve any pending credit issues to enhance your score before applying.
Calculate Your DTI Ratio: Lenders evaluate not only credit scores but also debt-to-income (DTI) ratios. The DTI ratio, the total of your monthly debts divided by your monthly income, can favour your application if low. Generally, a DTI below 45% (including the proposed HELOC payment) is ideal.
Submit the HELOC Application: In today's digital era, loan and credit line applications have transformed. Besides visiting a physical bank to meet with a Mortgage Advisor, you can also complete a HELOC application online or over the phone, submitting the necessary supporting documents electronically.
Await a Decision: The most demanding part of the HELOC process may be awaiting approval. Luckily, most applications are processed within a few business days.
Home Appraisal: Lenders will base their final HELOC offer on the actual value of the property, which usually necessitates an impartial home appraisal. This appraisal may positively or negatively impact the HELOC amount.
Final HELOC Steps: Once the review process is finalized, the lender sets a closing date to finalize the HELOC documents. On the fourth day post-approval, it's time to rejoice as your HELOC should be ready to access.
Got questions about how a HELOC might work for you? Complete the form below or reach out to us today!
*Interest on credit extension exceeding the fair market value of the dwelling is not tax-deductible for Federal Income Tax purposes. For further information on the deductibility of interest and charges, please consult a tax adviser.
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