Home Equity Line of Credit: The Facts

A home equity line of credit can be a great way to use your home equity to finance big ticket items such as home improvements, paying off high-interest debt, or buying a second home.

What Is a Home Equity Line of Credit?
A home equity line of credit (HELOC) is a type of second mortgage . The way a HELOC works is very similar to the way a credit card works. Your home equity is used as the collateral for the loan and you receive a line of credit from which you can draw money.

Benefits of a Home Equity Line of Credit
Using your home equity line of credit for home improvements, consolidating your high-interest debts, or keeping a "rainy day" fund, is a better financial alternative than using your credit cards. Here are the top 4 home equity line of credit benefits:

You get a lower interest rate than you would with your credit cards. That means you pay less interest over the life of the loan.
You get tax advantages that are not available with credit cards. With a home equity line of credit, the interest is usually tax-deductible.* Interest on credit cards is not tax-deductible.
You get flexibility in your payment options. Lenders like Quicken Loans offer interest-only options to help make your payments more flexible. With an interest-only home equity line of credit, you have the option to pay only the interest for a pre-determined amount of time or pay interest plus as much or as little principal as you want.
You get much larger credit limits. Quicken Loans offers home equity lines of credit up to $500,000. This is a great option to have when making a large purchase, such as remodeling your kitchen or adding an addition to your home.
How Does a Home Equity Line of Credit Work?
A home equity line of credit has several unique characteristics. Here is a quick overview:

During the initial years of the loan, you are usually only required to make interest-only payments and you only make payments if and when you draw money from your account.
After the initial years of the loan, the full balance is amortized and paid off over remaining years. An initial minimum draw (taking the money in cash) is sometimes required at closing. However, Quicken Loans does not require an initial minimum draw on HELOCs.
Like any standard loan, the interest rate and annual percentage rate (APR) are calculated based your credit score , and the combined loan-to-value ratio (CLTV) . Generally, the lower CLTV ratio you have, the lower your interest rate and APR will be.
Your interest rate adjusts as the result of an index plus a margin . The index, which can change, is the Prime Rate as published in the Wall Street Journal at the time of the adjustment period . The margin, which can not change, will be determined at the time of your application.

Applying for a Home Equity Line of Credit

Here's how the Quicken Loans home equity line of credit application process works:

First, we ask for some basic information about you, your income and the property. Your Social Security number is necessary to pull a copy of your credit report. There's generally less paperwork involved, so closing on a home equity line of credit is quicker than a standard first mortgage .
Quicken Loans can approve you right over the phone, schedule your closing online, and close your home equity line of credit in as little as 7-10 days.
Closing fees are generally required; however, Quicken Loans has eliminated most closing fees. In order to close your loan, you will likely have to pay local city, county and state recording fees and taxes. Depending on the state you live in, you may also be charged attorney fees. These closing fees can either be deducted from your line of credit or you can bring a cashier's check to pay for them at closing.
If you would like to learn more about home equity lines of credit, call us at 800-251-9080 to talk to a Quicken Loans Home Loan Expert.

* Please consult your tax advisor.

VIA Quickenloans