Does Your HELOC Have You Headlocked?

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So you’re curious about a HELOC? Perhaps you’d like some extra cash for home improvements? Or maybe you need to pay a few bills. For some homeowners, a HELOC (home equity line of credit) can be a low-interest option.

Let’s cut to the chase and answer the question that you came here for.

How much equity can you cash out of your home?

Home equity options aren’t as generous as those of before the housing bubble burst year back. But they’re not just pennies either, especially for homeowners that have seen their home appreciate in value. If you live in a city that is experiencing a rapid increase in home values this could be even better news for the HELOC seeking homeowner.

Alright, so years ago, homeowners could borrow up to 100% of their equity. Today, most lenders put significantly lower limits — like 80 to 90% — on home equity borrowing. Typically lenders calculate the amount of equity you can take out like this:

80% – 90% of home’s current appraised value, minus amount owed on the home.

Borrowing Scenario

For example, Mr. & Mrs. Write own their home and want to take our equity (HELOC)

  • Home’s current appraised value: $190,000
  • 80% of appraised value: $152,200
  • Amount the Writes owe on mortgage: $128,633
  • 80% of home’s value minus amount owed: $23,367

The bank will give them a credit line of $23,367 or less.

This credit line is far different from homeowners hoping to get 100% of equity they’ve paid thus far.

Also, current HELOC rates are around 3.25%.

How HELOC effects your Credit Scores

Be sure that your lender will run a credit check for your HELOC application. Your credit score has a big influence on home equity rates. Before shopping, check your credit score for free at The way credit bureaus handle HELOC differ a little. Because a HELOC is an open line of credit, the credit bureaus treat it in two ways. Over $50,000 the HELOC is treated like a second mortgage (installment loan). If under $50,000 it’s treated like a credit card (revolving credit).

Is a HELOC right for you? Get familiar with a few similar options for getting cash.

Home equity line of credit (HELOC)

A second mortgage with a revolving balance, like a credit card, with an interest rate that varies with the prime rate. Pronounced HE-lock.

Home equity loan

A second mortgage for a fixed amount, at a fixed interest rate, to be repaid over a set period.

Cash-out refinance

A mortgage refinance for more than the amount owed. The borrower takes the difference in cash. Also called a cash-out refi.

Final word on HELOC: The RISK

Because a HELOC is borrowing against the equity in your home, and unless otherwise written, your home is the collateral. There is always the risk of losing your home by defaulting on your HELOC loan. Take your time while making a choice on how much you borrow and the extra cost of paying it each month.

Hope this post was helpful for you HELOC researchers. Be diligent about your research by talking to your bank, and make choices that will be good for your financial portfolio in the long term.

Keep it real!


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