HELOC is the acronym for a Home Equity Line of Credit, a type of financing used by many homeowners across the United States.
A HELOC is a secured line of credit placed against a borrower’s home or property, using a lien placed against the property’s title and available equity. As such, HELOCs are a type of mortgage loan and are regulated by both federal and state law.
A mortgage lender can provide a HELOC based upon the current appraised value of a home, and the available equity in the property. The home does not necessarily have to be a borrower’s primary residence although most HELOCs do have that requirement.
The available equity in the property will help determine the amount of credit issued to the borrower. Most HELOCs allow for a line of credit to be issued up to 90 percent of the value of the home, subject to other lender limitations.
For example, if a home is appraised at $300,000 a HELOC can be issued up to 90 percent of $300,000, or $270,000. Most HELOC lenders, however, will limit the HELOC amount regardless of the value of the property. A common HELOC limit is $100,000, but specific financing limits can vary based upon regional property values and lender competition.
A HELOC will almost always take a subordinate position to a first mortgage lien. A subordinate position means any prior outstanding mortgage on a property has first claim on the property, and the proceeds from any sale or foreclosure action will first go toward paying the first mortgage lender in full, before any funds are used to satisfy any second mortgage or HELOC balances.
Any equity loan – such as the HELOC or its more-established sibling, the home equity loan – must always consider any current mortgage loans on the property when determining the maximum line of credit or equity loan to be issued. If there is a $250,000 first mortgage and a $300,000 appraised value, the HELOC would be limited to 90 percent of the combined loan to value, or CLTV, of both loans. In this example, the maximum HELOC amount is $270,000 (90% of the CLTV) less $250,000 (first mortgage), or $20,000.
The borrower may access the HELOC repeatedly and at any time to obtain cash – as long as the borrower has not exceeded the HELOC limit. If the HELOC is used and there is a balance in the account, minimum monthly payments are typically required.
The HELOC is a credit line, much like a credit card, and the borrower may tap into the equity whenever funds are needed, repaying the issuing lender based upon the previously issued HELOC agreement. As home equity loans and credit lines are forms of mortgage financing there are instances when interest on a HELOC may be tax deductible. Tax professionals should be consulted when discussing the tax implications of a HELOC.
HELOCs are one of the most convenient and least expensive lines of credit available to consumers today. As most regional and national banks and credit unions offer HELOCs the competition for HELOCs can be intense. Take advantage of this competition in the HELOC market by comparing offerings from several lenders before placing a HELOC against your home’s available equity.
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