Real Estate and Home Equity Lines of Credit

Is it time to renovate your kitchen or bathroom? Do the floors in the living room need refinishing or the house need paint outside? All of these can be expensive and we don’t always have adequate savings to pay for major remodels. What are our options? A home equity line of credit can be our savior.

A home equity line of credit or HELOC in banking parlance, is a mortgage secured by your home with a deed of trust. It can be a first or second mortgage depending on your home’s current encumbrances.

A second mortgage can be a loan or a line of credit with the line of credit option the most popular. By taking a fixed term loan, one must start repayment with interest immediately on a monthly basis; even if you have not used the funds yet and they are sitting in a savings account. There are times and places where a loan may be a good option for your second mortgage.

The HELOC tends to fill the bill rather nicely for renovations and remodels. The interest rate is based on one of the common indexes like the LIBOR (London Inter Bank Offered Rate) or the Wall Street Journal Prime Rate which is an index based on the prime lending rate of 30 banks. A prime lending rate is the rate at which the bank lends to its best customers. The adjustable rate of the HELOC usually is a “prime plus” interest rate. This may be prime plus 2%, 3%, etc. The rate will change as the market changes. If today’s prime rate were 3.5% and your HELOC was prime plus 3%, your rate would be 6.5%.

A HELOC is a line of credit where its maximum loan amount is based on your home’s value. Most financial institutions will allow you to encumber up to 80% of your home’s value with a HELOC. We refer to this as a loan to value ratio or LTV. Here is an example of loan to value calculation for a HELOC:

Home Value:                $300,000

First Loan Amount:       $180,000

Max Equity 80%LTV   $240,000

Max HELOC               $ 60,000

In the case above, the home would qualify for a $60,000 line of credit.

This house qualifies but does the homeowner? In underwriting, we will match up your

housing costs (principal, interest, taxes, and insurance) with any additional debt you may have to determine the amount you have available to pay on your debts. This ratio can be calculated as 35% to 45% depending on the underwriting guidelines of the institution. In example: If the ratio is 40%, the maximum debt to income ratio amount would be $400 for each thousand dollars in income.

The home equity line is an excellent way to leverage the unused equity in your home and make substantial improvements that can increase the value of your asset. Here at Meriwest Credit Union we can typically provide a preliminary approval within 24 hours. These HELOC deals run about 3 weeks from start to finish. The main hold up is getting the appraiser to the property. There are a limited number of them and a great many properties waiting for to be appraised.

Interested in doing some work on your home? Here is a link to our Home Equity Line of Credit page.

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