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MORTGAGE KNOWLEDGE CENTER

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HELOC LOANS

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  1. Home
  2. Mortgage Knowledge Center
  3. HELOCs 101: Understanding the Basics

MORTGAGE

HELOCs 101: Understanding the Basics

What You'll Learn: HELOC Basics, Application Process, HELOC Timeline, Pros and Cons of HELOCs

EXPECTED READ TIME:5 minutes

June 28, 2023

HELOCs 101: Understanding the Basics

Home equity lines of credit, or HELOCs, can be a powerful financial tool for homeowners. They offer a flexible way to tap into the equity in your home when you need it. This article will walk you through the basics of HELOCs, how to get one, the typical rules, and potential pitfalls to avoid.

What is a HELOC?

A HELOC is a type of home equity loan that works like a credit card. You're given a line of credit that's available for a set period, usually up to 10 years. This period is known as the draw period, and you can borrow against your line of credit during this time. 

  • Equity: The equity in your home is the difference between the market value of your house and the amount you owe on your mortgage. As you pay down your mortgage, your equity increases. Additionally, if your house's worth appreciates, your equity also grows. This appreciation can be calculated using a home appreciation calculator. It's important to note that equity can fluctuate as market conditions change, affecting the amount you can borrow.
  • Line of Credit: Unlike a traditional loan, a HELOC gives you a pool of money that you can draw from as needed. You only pay interest on the amount you borrow. This flexibility can be beneficial for covering large expenses such as home renovations or college tuition; however, it also requires discipline to avoid overspending.
  • Interest Rates: The interest rates for home equity loans are typically variable, meaning they can increase or decrease over time. It's important to consider this when planning your budget and repayment strategy. Some lenders offer a fixed-rate option, but this usually comes with higher initial rates.

Understanding these elements is crucial to making informed decisions about whether a HELOC is right for you. It's also worth noting that the interest you pay on a HELOC may be tax-deductible if you use the funds to buy, build, or substantially improve your home.

How to Get a HELOC

Obtaining a HELOC involves a process similar to getting a mortgage. You'll need to complete an application process with a lender, which typically includes a credit check and an appraisal of your home.

  • Credit Check: Lenders will look at your credit score and history to determine your creditworthiness. A good credit score can help you secure a better rate for your home equity loan. If your credit score is less than stellar, you may want to take steps to improve it before applying for a HELOC. This could involve paying down existing debt, making timely payments on current revolving accounts, and avoiding accrual of new debt.
  • Home Appraisal: The lender will need to determine the current market value of your home. This is important for calculating how much equity you have and how much you can borrow. The appraisal will consider factors like the condition of your home, recent sales of similar homes in your area, and market trends.
  • Debt-to-Income Ratio: Lenders also consider your debt-to-income ratio, which is your monthly debt payments divided by your gross monthly income. A lower ratio can increase your chances of approval. If your ratio is high, you might need to pay down debt or increase income before you can qualify.

Remember, you don't need to get a HELOC from the same lender as your mortgage. Shop around to find the best rates and terms. Different lenders may offer different interest rates, fees, and loan amounts, so it's worth taking the time to compare your options.

The Timeline for a HELOC

The process of getting a HELOC can take anywhere from a few weeks to a few months, depending on the lender and your personal circumstances. It's important to plan ahead if you're considering a HELOC to cover upcoming expenses. 

The timeline typically includes the application process, underwriting, home appraisal, and closing. Each of these steps can take time, and delays can occur due to issues like problems with the appraisal or the need for additional documentation. It's also worth noting that you have the right to cancel the loan within three business days of closing, for any reason, and without penalty. This "right of rescission" is a protection provided by the Truth in Lending Act.

Typical Rules for a HELOC

While a HELOC offers flexibility, there are rules and requirements to keep in mind.

  • Borrowing Limit: Your borrowing limit is based on the equity in your home. Most lenders allow you to borrow up to 85% of your home's appraised value, minus the amount you owe on your mortgage. This limit can be influenced by factors like your credit score, income, and the lender's policies.
  • Repayment: During the draw period, you may be allowed to make interest-only payments. After the draw period ends, you'll need to start paying back the principal plus interest. This repayment period typically lasts 10 to 20 years. It's important to plan for this transition, as your payments can increase significantly once you start repaying the principal.
  • Potential for Foreclosure: If you fail to repay the loan, the lender could potentially foreclose on your home. This is a serious risk and one that should be carefully considered before taking out a HELOC. It's crucial to have a realistic plan for repayment and to consider potential changes in your financial situation.

Potential Pitfalls of a HELOC

While a HELOC can be a valuable resource, it's important to be aware of potential pitfalls:

  • Variable Interest Rates: Unlike a fixed-rate loan, the interest rate on a HELOC can fluctuate over time. This means your payments could increase, potentially significantly, if rates rise. It's important to budget for this possibility and to understand how much your payments could change if rates increase.
  • Risk of Overborrowing: Because a HELOC provides easy access to funds, it can be tempting to borrow more than you need – or can afford to repay. This can lead to financial difficulties down the line, particularly if your financial situation changes or if interest rates rise.
  • Potential for Negative Equity: If your home's value decreases, you could end up owing more on your mortgage and HELOC than your home is worth. This is known as being "underwater" on your loans and can make it difficult to sell or refinance your home.

Navigating the World of HELOCs

A home equity line of credit can be a flexible and convenient way to tap into the value of your home. By now understanding how they work, the process of getting, and the potential risks, you can make an informed decision about whether a HELOC is the right financial tool for you. Remember, it's always wise to consult with a financial advisor or trusted lending professional when considering a significant financial decision like this. They can provide personalized advice based on your specific circumstances and goals. Additionally, they can help you understand the tax implications of a HELOC and how it fits into your overall financial plan. 

While a HELOC can provide access to funds when you need them, it's also a form of debt that uses your home as collateral. Therefore, it's crucial to borrow responsibly and to have a clear plan for repayment. This includes understanding the terms of your loan, keeping track of your spending, and making regular, on-time payments. So, whether you're looking to finance a major purchase, consolidate debt, or cover unexpected expenses, a HELOC can provide the financial flexibility you need. 

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

Top 10 Benefits of a HELOC

There are plenty of benefits to a home equity line of credit, or HELOC. By leveraging equity in your home, you can take advantage of the benefits.

Couple calculating a budget together.

What Is Home Equity?

There's a lot to know about home equity. We'll answer: What is it, and how's it calculated? How can you use home equity to your advantage? And, can you use it for anything you choose?

Couple looking over documents

What Are the Pros and Cons of a HELOC?

A HELOC (home equity line of credit) has some advantages and disadvantages other equity loans don't. Find out what they are so you can decide if a HELOC is right for you.

files and binder on a desk

10 Ways to Use the Equity in Your Home to Your Advantage

Using the equity in your home can be a smart financial move. Check out the top 10 reasons many homeowners consider a home equity loan or line of credit to reach their goals.

Houses in neighborhood
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HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of October 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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