What is a Home Equity Line of Credit (HELOC), and is it Right for Me?

A HELOC is a line of credit that allows homeowners to borrow against the equity in their home. A HELOC is like a credit card, giving you the flexibility to make purchases up to your limit and only paying on the balance and interest on the amount you draw.    

So, what makes a HELOC different from other lines of credit? Typically, home equity lines have lower interest rates compared to other credit products since it is secured, using your home as collateral. Despite the uncertain interest rate environment, there may be promotional interest rates to encourage you to apply (see ASB’s promotional HELOC rates). If a HELOC suits your needs, here are some things that improve your likelihood of approval.

Equity in your home

Since you’re using your home as collateral, the amount of equity helps to determine how much you can borrow. Your equity is calculated by subtracting your mortgage balance(s) from the market value of your home.    

Let’s say your home has a market value of $500,000 and your mortgage balance is $300,000, your equity is valued at $200,000, or 40%. Lenders generally require a minimum of 15-20% equity in the property.

Good Debt-to-Income (DTI) Ratio

Your DTI ratio is determined by your monthly income and monthly debt payments. Lenders use DTI to measure how much of your monthly income is going toward mortgage payments, credit cards, car loans, student loans, and other payments. Generally, a good DTI is below 43%. Estimate your DTI by using a DTI calculator online or old-school with pen and paper.    

DTI = (Total monthly debit payments / monthly income) x 100

Credit Score

Your credit score is a key determinant of your rate, payment structure, and approval. A credit score is a number that reflects your ability to manage debt, which lenders use to determine how likely you are to repay. According to an Experian article most lenders are looking for a credit score of 720 or more when approving HELOCs.

Documents

Documents, the bane of our existence. A complete set of documents helps to expedite your application across the finish line. To begin the approval process, please have the following documents as part of your application (your lender may ask for additional information):

• Completed and signed HELOC application
• Income documents, as applicable
  • Paystubs covering the most recent month
  • Last two years’ personal tax returns and W-2s
  • Social Security Award Letter or most recent 1099s
  • Pension, annuity, or retirement account statements
• Insurance policies for fire, hurricane and flood, if applicable
• Current mortgage statement for your home
• If a trust has title to your real property, a copy of your trust documents (including all amendments and restatements)
• Name of condo project and monthly maintenance fee, if applicable
• Solar energy agreements, if applicable
• Copy of the Final Closing Disclosure – if any of the following apply:
  • You sold a property in the last year
  • You purchased a property within the last three months
  • Refinanced a mortgage within the last three months

Once you have your required documents, you are ready to apply for your HELOC! A Home Equity Line of Credit is a powerful tool that gives you the flexibility to put your kids through school, start your dream renovation, or cover unexpected expenses life throws your way. Make an appointment with a ASB banker today to make your dreams a reality!

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