You may have heard the term HELOC, but may not really know what it entails, or what the acronym even stands for! A HELOC loan is a Home Equity Line of Credit (pronounced Hee-Lock). It can be utilized to leverage the equity in your home to pay off higher interest rate debt, complete a re-model on the property, or to use in the process of Purchasing a new home.
HELOC loans have a set limit that can be utilized for a specific reasons. For example, the purchase of new home, pay off higher rate consumer debt, or to keep as a reserve in the event of an emergency or unexpected financial expenses. When used to assist in the Home Buying Process, you would use the down payment you have, in addition to the HELOC, to have a 1st Mortgage Balance of 80% of the Purchase Price (to avoid the mortgage insurance). For example, if you are purchasing a $100,000 Home, you would have a 1st Mortgage Loan for $80,000, a HELOC for $10,000, and your down payment of the remaining $10,000. Eliminating the need for Mortgage Insurance on the 1st Mortgage Loan. Additionally, the interest paid on a HELOC (in most cases), is tax deductible. Consequently, providing a great savings over the years and/or life of the loan. Also, mortgage insurance is non-deductible. Furthermore, the remaining amount of the credit limit becomes available for you to use as needed as you pay down the principal balance of the loan.
With a HELOC, you have a limited amount of time that they can withdraw funds. It’s usually anywhere from 10 – 15 years, which is called “Draw Period” with an Amortization period (or payment schedule) of 25 – 30 years. The payments are normally interest-only. However, additional payment may be applied to the principal balance in order to pay off the loan faster. HELOC’s are typically tied to a variable rate index, along with a margin to determine an effective interest rate. Essentially, the interest rate may vary based off the prime rate plus margin.
If you’re thinking you’d like to take advantage of the Colorado Real Estate Market and would like to use a HELOC to accomplish some desired home improvements, pay off higher interest rate debt or to avoid costly Mortgage Insurance, please let us know!!!
If you already own your home and would like to take out a HELOC, the funds will be available to you upon the closing of the loan and may be used immediately. If you are using the HELOC to purchase a new home, then the funds are applied at the time of settlement. This will eliminate the need for mortgage insurance or paying more down payment upfront.