Home Equity Line of Credit (HELOC)

A HELOC acts like a credit card, with revolving financing you can borrow, pay back and borrow again during the draw period.

A home equity loan differs in that it’s more like a traditional mortgage. It’s a loan rather than a line of credit. You borrow one specific amount and make regular payments during a fixed repayment period.

For a home equity loan, you apply for the total amount of financing you need. This amount will depend on how much equity you’ve paid into your home, as that is what you’re borrowing against. Again, you receive it as one lump sum. During the agreed-upon repayment period, you pay a fixed monthly amount that goes both toward interest and the loan principal, much like a mortgage.

Both HELOC and home equity loans offer lower interest rates than many personal loans because your home is used as collateral with the lender.

In most cases, a HELOC is flexible and can be used for any expenses you choose.

It’s common to get a HELOC to cover expenses such as student loans, home renovations, emergency expenses like medical bills or other purchases for which you might obtain a personal loan, such as buying a car.

Because its interest rates are lower, a HELOC is also great for consolidating and paying down high-interest debt like what is owed on a credit card.

You can borrow only what you require, which is helpful if you’re initially uncertain about how much your total expense will be and how much financing you will need. This prevents you from borrowing and paying interest on more than you need if, for example, the expense you’re using it to cover is lower than anticipated.

Once approved, in many cases, you’ll have access to your HELOC funds right away through checks or a card from the lender that is tied to your HELOC account.

When you apply for a HELOC, we’ll work with you to establish agreed-upon terms. Part of those terms will involve deciding the length of time for the draw period (the time during which you can borrow), as well as the length of the repayment period.

During the draw period, you’ll make minimum monthly payments on the amount you’ve drawn (and that you owe). During this time, you can pay more of your overall balance so that you can continue to borrow against it up to a certain amount, much like how a credit card’s limit works. This draw period may last for 5-10 years, as an example.

After that time period ends, you’ll begin the repayment period where you can no longer withdraw funds and will instead begin paying down the remaining balance with interest. The repayment period may be 10-20 years, for example.  

HELOC interest rates are lower than other personal loans or credit cards. This is possible because you’re borrowing against an asset—your home—that helps to secure the loan. 

Your home is valuable collateral that the lender can rely on if you can’t repay your HELOC. This makes lending the money less of a risk for the lender so that you can have easier access to financing.

Caution, however: You should consider any concerns you might have about repaying a HELOC because, if you can’t make payments, your home is on the line for the balance you owe.

You’ll most likely need proof of reliable, ongoing income to be approved for a HELOC, because consistent income shows that you can make monthly payments to pay back your loan. This aspect of qualification will probably include providing W-2s and pay stubs.

If your income is too low to get approved, a co-signer may help to meet DTI requirements.

If you don’t have consistent income from a traditional job, it may be more challenging to get approved for a HELOC; but there are other sources of income that can be considered. These additional sources might include income from investments like real estate or retirement accounts, self-employment, a pension, a trust fund, social security, child support, long-term disability or VA benefits.

We’ll help you determine if you have the necessary factors and documentation in place to get approved for a HELOC. Contact us at Compass Mortgage! We can help you make the decision that’s right for you.