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6 Questions to Ask Before Getting a HELOC

There are many situations when you might consider how to use your home equity to cover various expenses. Perhaps you want to make some home improvements, or an ongoing medical need or an emergency pops up. In any scenario, you could look at different ways of borrowing money to pay for these expenses. As a homeowner, you may be deciding between a home equity loan and a home equity line of credit (HELOC).

As you determine which type of borrowing option is best for you and your circumstances, you’re likely working through a few important considerations. Below we’ll help answer some of the more common HELOC questions to ask your credit union, so you can make the right decision for your needs.

1. What is the required loan-to-value ratio for a HELOC?

When researching lenders, whether you’re looking at banks or credit unions, find out what amount of equity is required to qualify for a HELOC. 

Generally speaking, borrowers need to have at least 20% equity in their homes. If you’re not sure what percentage equity you have, calculate your home’s loan-to-value (LTV) ratio.

2. What is the rate, and how will it change after an intro period?

HELOCs work a little bit like credit cards. They’re a revolving line of credit that resets as you make payments. It’s important to know the interest rate you’re looking at, and if there’s an intro APR or even an interest-free introductory period. Be sure to ask how your rate may change after that initial time frame.

Your lender will review your credit report, and your rate will be dependent upon your credit score.

3. How long is the draw period, and what is the minimum?

HELOCs are structured in two parts: the draw period, followed by a repayment period. The draw period is shorter, generally about ten years, and the repayment period can be up to twice as long, around 20 years. 

Please note that UCCU offers various HELOC options each with its unique draw periods and repayment periods. 

During the withdrawal period, you can borrow as frequently as you need to, and every repayment resets your credit limit. Your monthly minimum payments will likely only be interest payments, but you can choose to pay down or pay off the principal. At the end of this timeframe, you go into a repayment period, during which you can no longer borrow. This is the period where you pay off your remaining balance and accumulated interest.

Once you know your rate and how it changes after the intro period, understanding how long your draw period is and the required minimum is important so that you can determine how much to withdraw and when. 

Think about whether you can pay down or pay off your balance before your withdrawal period ends, and whether your budget can handle the monthly payments once your repayment period starts. This knowledge enables you to make smarter decisions when you’re considering taking out more cash to pay for a new or additional expense.

Your repayment period payments may be higher than the minimum payments you made during your withdrawal period. Even more importantly, check to make sure that there isn’t a large lump sum at the end of the payment period. This is called a balloon payment, and it consists of the principal that you haven’t paid during the entire loan term.

4. What is the average balance requirement?

Find out if your HELOC lender has an initial minimum draw requirement. This will be the minimum amount you are required to withdraw upon closing on your HELOC. This isn’t a feature on every HELOC, but many have them. 

Alternatively, your lender may require you to maintain a minimum outstanding loan balance. If you fail to do so, they may charge fees in response.

5. Are there closing costs, or any other additional costs?

Be sure to ask your potential lender if you’ll be required to pay closing costs, loan origination fees, or any other associated fees that may be separate from the HELOC principal and interest rates.

Related: Home Equity Fees and Terms Explained

6. Is my interest tax-deductible?

Finally, certain types of HELOC interest on home updates and improvements can be tax-deductible, if they meet certain requirements. Review your desired updates with a tax consultant to see whether the types of changes you’re considering for your home will be eligible for these tax savings.

Let UCCU Answer Your HELOC Questions

If you’re a homeowner who is considering a HELOC (or other loans and forms of financing), our members have access to a variety of home equity options at highly competitive and personalized rates. 

Have more HELOC questions? Check out some of the common requirements to get answers! 

Requirements for a Home Equity Line of Credit (HELOC)