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6 Questions to Ask Before Getting a HELOC

a couple stands in their kitchen envisioning their renovation ideas after getting all of their HELOC questions answered

What is a HELOC?

When it comes to leveraging your home equity to cover various expenses, such as home improvements, medical needs, or emergencies, exploring different borrowing options becomes essential. As a homeowner, you may find yourself weighing the pros and cons of a home equity loan versus a home equity line of credit  (HELOC). To help you make the most informed decision for your unique circumstances, we’ve expanded our list of important questions to ask your credit union or lender when considering a HELOC.

A home equity line of credit is a financial option that allows homeowners to borrow money using the equity they have in their homes. Equity is the difference between the value of the home and the amount of money still owed on the mortgage. Let’s say that you have a house worth $200,000, and you still owe $150,000 on your mortgage. That means you have $50,000 in equity. With a HELOC you can borrow money against that $50,000 to pay for other expenses. 

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

As you research potential lenders, whether banks or credit unions, it’s crucial to understand the level of equity required to qualify for a HELOC. Generally, borrowers need to have a minimum of 20% equity in their homes. Calculating your home’s loan-to-value (LTV) ratio helps determine your eligibility. This ratio is the percentage obtained by dividing the outstanding mortgage balance by the appraised value of your home. It’s important to note that different lenders may have varying LTV requirements, so it’s wise to inquire specifically about their criteria. By understanding the required loan-to-value ratio, you can assess your eligibility and determine if a HELOC is a viable option.

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

HELOCs operate similarly to credit cards, providing a revolving line of credit that resets as payments are made. Understanding the interest rate associated with your HELOC is essential for long-term financial planning. Inquire about whether there is an introductory Annual Percentage Rate (APR) or an interest-free period and how the rate may change after this initial time frame. Some HELOCs offer a fixed interest rate during the draw period, while others have variable rates tied to an index such as the prime rate. Remember, your credit score plays a significant role in determining the interest rate you’ll receive, so it’s essential to review your credit history and address any potential issues before applying. Additionally, consider the potential impact of interest rate fluctuations on your monthly payments and budget. For tips on increasing your credit score check out Credit Builder offered by UCCU!

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

A HELOC consists of two distinct periods: the draw period and the repayment period. The draw period typically lasts around ten years, during which you can borrow funds as needed. Each repayment you make resets your credit limit. It’s important to understand the draw period’s duration and the minimum repayment requirements. This knowledge allows you to strategically plan your withdrawals and make informed decisions about how much to borrow and when. Additionally, consider whether you can pay down or pay off your balance before the draw period ends, and assess whether your budget can accommodate the higher monthly payments that come with the repayment period. Understanding the draw period’s length and requirements empowers you to manage your funds effectively and make the most of your HELOC.

4. What is the average balance requirement?

To ensure a smooth HELOC experience, inquire whether the lender has any initial minimum draw requirements. Some lenders may stipulate a minimum amount that must be withdrawn when closing the HELOC. Moreover, certain lenders may require you to maintain a minimum outstanding loan balance throughout the draw period. Familiarize yourself with these requirements to avoid any unexpected fees or complications. Keep in mind that maintaining a higher balance than necessary may result in higher interest costs, so it’s important to evaluate your borrowing needs and align them with the lender’s requirements. By understanding the average balance requirement, you can plan your borrowing strategy accordingly and minimize any potential penalties or additional costs.

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

Before committing to a home equity line of credit, it’s important to gain clarity on the associated costs. Inquire about potential closing costs, loan origination fees, or any other fees separate from the loan principal and interest rates. Closing costs typically include appraisal fees, title search fees, attorney fees, and recording fees. Loan origination fees are charges imposed by the lender to cover the costs of processing and extending the loan. By understanding the complete cost structure, you can evaluate the financial implications and determine whether a HELOC aligns with your budget and goals. Keep in mind that while some lenders may offer promotions or incentives to cover certain fees, it’s essential to assess the long-term costs and benefits  Learn more about UCCU’s specific Home equity fees and terms explained

6. Is my interest tax-deductible?

One of the potential advantages of a HELOC is the opportunity for tax deductions on the interest paid, particularly when used for eligible home updates and improvements. In the United States, the Tax Cuts and Jobs Act of 2017 introduced changes to the deductibility of home equity interest. Consulting with a tax professional can provide valuable insights into whether the specific changes you plan to make to your home qualify for these tax savings. Keep in mind that tax laws and regulations may change, so it’s essential to stay updated on the latest guidelines and consult with a qualified tax advisor before making any assumptions about potential deductions.  Let a UCCU expert help answer any questions you may have.

Let UCCU Answer Your HELOC Questions

When it comes to exploring HELOCs or other financing options, UCCU offers its members access to a variety of home equity solutions at competitive and personalized rates. Whether you have additional questions about HELOCs or seek further clarification on other financial matters, UCCU’s knowledgeable professionals are ready to provide the guidance and information you need to make well-informed decisions that align with your financial goals.

Making informed decisions about home equity options, such as a HELOC, requires careful consideration and thorough research. By asking the right questions and obtaining comprehensive information about loan-to-value ratios, interest rates, draw and repayment periods, average balance requirements, associated costs, and tax deductibility, you can confidently navigate the complexities of home equity lines of credit. With the support of UCCU and its range of home equity solutions, you can embark on your financial journey with confidence, knowing you have the information and resources necessary to make sound decisions that benefit your long-term financial well-being.

Requirements for a Home Equity Line of Credit (HELOC)