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Financial Wellness
Understanding How the Equity in Your Home Can Work for You
The rise in property values coupled with increasing mortgage rates has created a buzz around home equity lines of credit (HELOCs) as a great way to borrow. Since this type of loan uses your home as collateral, let’s review the basics to understand if a HELOC is right for you.
A home equity loan allows you to borrow money against your home, as you need, up to a maximum line of credit. HELOCs often have a variable rate, tied to an index. Eligibility and requirements vary by type and lender.
Most homeowners who decide to leverage their equity use it to build on that equity with home updates or expansions. Paying off high interest debt and educational expenses are other good uses for HELOCs.
What You’ll Need to Qualify for a HELOC
Equity in Your House:
Your home equity is the amount left after subtracting what you owe on your mortgage from your home’s current value. Lenders will consider your loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio to estimate how much you can borrow.
The LTV ratio is calculated by dividing your mortgage balance by your home’s appraised value. The CLTV ratio is calculated by dividing the combined loan balances held against your home by your home’s appraised value.
For example, if your home is appraised at $1,000,000 and your mortgage balance is $500,000, your LTV is 50%. If your lender allows a CTLV of up to 80%, the equity you can borrow is $300,000.
Good Credit:
Although HELOCs are secured loans, lenders will still review your credit score and history to determine your creditworthiness and credit risk.
Sufficient Income & Documentation:
Lenders want to see that you can afford repayment and will ask for proof of income to qualify. Verification of employment and income may include recent pay stubs, W-2s, tax returns, social security award letters, or retirement benefit statements.
Low Debt & Strong Payment History:
A HELOC is technically a second mortgage, so a lender will review your payment history and your debt-to-income (DTI) ratio. To calculate DTI, divide all your monthly debt payments &emdash; including mortgage, credit cards, and auto loans &emdash; by your monthly gross (pre-tax) income. Typically, lenders look for a DTI ratio no higher than 45% to qualify for a HELOC.
Consider Your Options Carefully
Keep in mind that similar to mortgages, not all HELOCs and lenders are the same. It is important to compare rates, markups, usage fees, draw periods, balloon payments, and prepayment penalties.
A HELOC May Not Be Right for You If:
- Your income is unstable. If you don’t keep up with your monthly payments, you could lose your home to foreclosure.
- You can’t afford upfront costs. Unlike CEFCU, other lenders may charge fees to open, maintain, and access funds from your HELOC.
- You aren’t looking to borrow much money. A credit card with a low rate or a low-cost personal loan may be a better option.
- You can’t afford an interest rate increase. Variable rates leave you vulnerable to the economy and rising interest rates. Look at the interest rate caps — how much the interest rate can change at any one time and how high your interest rate could go up over the life of the loan — to gauge the potential impact on your payments.
Ready to Take the Next Step?
CEFCU’s lending team will work with you to find the best solution for your needs. Check out our HELOC options on our online Real Estate Loan Center.
This content is for informational purposes only.
Visit our online Real Estate Loan Center to view rates and terms.
*Certain exceptions may apply for jumbo loans or property types. Rates and terms are those in effect at the time of release and are subject to change without notice. Final loan approval is subject to credit and collateral review as well as meeting program guidelines. Higher limits may be extended, based on certain criteria. Combined Loan-to-Value (CLTV) not to exceed 75% of the appraised property value. Property must be located in California. Property insurance is required. $1,000 processing fee is waived on new money loans or refinanced loans from another financial institution. Maximum APR is 18% on 10-Year Interest Only Lines and 14% on Traditional Lines. The APR is variable, based on an index plus a margin and subject to change four times a year. The index is the highest Prime Rate published in The Wall Street Journal. CEFCU is an Equal Housing Lender. NMLS #626590.
