If you’re a homeowner, chances are that you’d like to make some changes to your abode. However, many people hesitate to make these upgrades, worried that they don’t have enough money to turn their house into their dream home. Some homeowners wait to make upgrades only when they’re ready to sell their house, spending time and money on improvements that someone else will enjoy.
To that we say, “Why wait?” The money you need to remodel, renovate or add on can be available to you now with a Home Equity Line of Credit, also referred to as a HELOC. Your home equity, simply, is the market value of your home minus the amount you owe on your mortgage. A HELOC lets you draw upon your home’s available equity to get the money you need, up to your approved credit limit, for virtually any purpose including home improvements, debt consolidation, education costs and other expenses.
How Does a Home Equity Line of Credit Work?
A Home Equity Line of Credit gives you access to borrow funds, using your home as collateral, when and if you need the money up to a maximum credit limit assigned by the bank. The credit limit available to you is based on your creditworthiness and the available equity in your home. Unlike a loan, which is distributed in one lump sum, a line of credit allows you to draw funds as you need them up to a pre-determined amount and as you repay the balance, it becomes available again for use. Interest rates are variable and are based on a percentage, also known as a margin, over or under the Prime Rate. This is referred to as “Prime Plus” or “Prime Minus” respectively. You only pay interest on the amount of the line of credit you use, similar to a credit card. However, unlike a credit card or other types of consumer credit, the interest you pay on your HELOC may be tax deductible. For more information on the tax deductibility of your interest, meet with your tax advisor.
The first step in establishing a HELOC is to complete a credit application.
Step 1: The Application
The application process determines if you’re eligible for a HELOC and the amount of funds you’ll be able to draw from. During the application, you will meet with a borrowing banking representative and provide financial information including proof of income. The bank you are borrowing from will then perform an appraisal or property evaluation, and obtain a report to verify how your property is titled.
HOME EQUITY LINES OF CREDIT REQUIREMENTS
There are three main factors considered when determining your eligibility and credit limit:
Your Credit History: A lending underwriter will first review your credit history and FICO credit score. Different lenders will have different credit requirements but will consider your entire credit history in determining if your credit can be approved.
Your Loan-to-Value Ratio (LTV): Your loan-to-value ratio, also known as your LTV, is used to determine how much you are eligible to borrow based on the amount of equity in your home. For example, if your lender allows you to borrow up to 80% of your home’s value, the maximum you could borrow using a $250,000 home as collateral is $200,000. To determine how much equity you have available to borrow, subtract the total outstanding mortgage balance for the property from the maximum amount you would be able to borrow. So if your mortgage balance is $110,000, the most you would be able to borrow on that $250,000 home is $90,000.
Your Debt-to-Income Ratio (DTI): Your debt-to-income ratio is the percentage of your monthly payments, divided by your monthly income. This helps a lender determine if you will be able to afford the monthly payments associated with your HELOC. To calculate your debt-to-income ratio, first list all of your current recurring monthly loan payments, which may include mortgage payments, credit card payments, student loans, or auto loan payments. Combine your monthly debt payments and divide by your monthly gross income. For example, let’s say your combined recurring monthly payments equal $1,200. If your monthly gross income is $3,200, to determine your DTI you will divide $1,200 by $3,200. In this instance, your DTI would be 37.5%. When the bank calculates your debt to income ratio, they will also include the amount of the payment on the new HELOC. For more information on determining your DTI, speak with your lending representative.
Step 2: Close Your Loan
If you are approved for a Home Equity Line of Credit you will attend a loan closing and sign the Loan Agreement. That Agreement will tell you about the 2 phases of the Line of Credit – the Draw Period and the Repayment Period.
Step 3: Drawing Funds and the Repayment Periods
During the Draw Period, you may withdraw money from your line of credit as needed up to your available credit limit. You may choose to make interest-only payments or principal and interest payments. If you are repaying principal on the line of credit, you may reuse the line of credit funds up to your limit throughout the draw period. In addition, some lenders offer a Fixed Rate Lock Option which allows you to lock in a rate and term on all or a part of the unpaid balance1. The length of the draw period varies between lenders, averaging between 5 and 10 years. At Santander Bank, the draw period lasts for 10 years.
Once your Draw Period has ended, you will begin the Repayment Period and will no longer be able to draw funds from your line of credit. During this time each month you will repay a percentage of the balance owed plus interest, and will no longer have the option to pay interest-only. If you have a Home Equity Line of Credit with Santander Bank, your repayment period will last 20 years.
WHAT CAN A HOME EQUITY LINE OF CREDIT BE USED FOR?
While some people use their HELOC to finance higher education or major life events, or to refinance existing debt, many use a line of credit to finance home improvements, renovations, additions and other home upgrades like:
- Replacing an old, dated bathroom with a brand new style.
- Remodeling a kitchen so you have more room to cook and entertain.
- Building a new garage or adding on to your current one.
- Creating a finished basement so you can enjoy the new space with family and friends.
These are just a few of the many possibilities available to you with a HELOC. But before you apply, it’s important to find a bank that offers competitive HELOC rates and easy access to your funds when you need them.
HOME EQUITY LINE OF CREDIT FEATURES
Are you ready to apply for a Home Equity Line of Credit? Santander Bank is here to help. Our HELOC comes with a number of great features, including:
- Easy access to your funds via check or an online banking transfer.
- A fixed rate lock option that enables you to set up predictable monthly payments by converting all or a portion of your outstanding balance to a fixed rate loan without losing access to additional funds you choose not to convert, up to your approved credit limit.1
- A 0.25% rate discount when you set up automatic payments from any Santander Bank checking account1.