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What is a HELOC?


Jan 20, 2023



Commonly known as a HELOC, a home equity line of credit allows homeowners to unlock their property’s accumulated equity. Using real estate as collateral, a HELOC is a loan that is secured by your home’s equity. 

But, what does this really mean, and how does it all work? 

If you are a homeowner unfamiliar with the home equity line of credit, we’d love to introduce you to HELOCs. Here is an overview of all things HELOC — what it is, how to get one, what you can do with it, and more.  

HELOC Defined 

A home equity line of credit is a second mortgage that homeowners take out on their homes, allowing them to borrow funds against their equity. 

By leveraging home equity, a HELOC provides homeowners access to cash that can be used to address a variety of needs — from home renovations, debt consolidation, medical bills, or even financing the vacation of a lifetime. 

Since a HELOC uses your home’s equity as collateral, borrowing qualifications are boosted. This gives homeowners access to favorable loan terms on their HELOC that they might not be able to access elsewhere, like on their first mortgage or on alternative credit lines. 

The amount you can borrow using your HELOC is directly related to the amount of equity you have built up in your home. 

5 Benefits of Leveraging a HELOC

The most popular benefit of taking out a HELOC? Low interest rates. 

HELOCs usually offer a lower interest rate than other credit lines and loan types. The most common interest offering on a HELOC is a variable rate based on a prime rate. If you have a strong credit history and a high credit score, you will qualify for lower interest rates compared to homeowner applicants with weaker credit. 

In addition to competitively low interest rates, HELOCs offer qualifying homeowners a myriad of benefits, such as: 

  • Providing access to funds
  • Repayment terms that meet your needs
  • Reduced fees 
  • Large credit line amounts 
  • Quick deployment of funds 

Disadvantages to Be Aware Of

To make an informed decision as to whether or not a HELOC is ideal for your current situation as a homeowner, it’s important to understand the potential drawbacks associated with HELOCs. 

Like any loan type, a HELOC is technically a form of debt. If not leveraged wisely, overspending on your HELOC can actually increase your monthly payment responsibilities — ultimately putting you in a less-favorable financial position, if you cannot comfortably afford the increased bill. 

Another thing to be aware of is that, as a variable interest rate loan, your monthly payment amount is subject to change based on the prime market rate. While it’s great news to see your monthly payments reduce due to drops in interest, increasing interest may not be as welcomed. 

If you are worried about the variable interest rate causing unpredictable changes to your monthly finances, you can shop for a HELOC that allows you to convert the balance to a fixed rate, or take a fixed rate draw. 

Talk to your lender about these flexible options when you are performing due diligence on HELOC offerings.

Who Should Get a HELOC?

The ideal candidate for a HELOC is a homeowner that meets the following criteria: 

  • A reliable stream of income
  • Strong credit 
  • Qualifying amount of equity accumulated
  • Responsible payment history 

If you meet these qualifications, the next question you should ask is, is now the right time to take out a HELOC? 

To determine if now is a good time for you to take out a HELOC, you should think about how you plan on using the funds. For example, you may have a pressing need requiring financial attention — or perhaps you simply want to build up cash savings as an emergency fund. 

How Does a HELOC Work?

Another consideration is how you will make the monthly payments on your account balance. A HELOC is broken up into two distinct phases: the draw period and the repayment period. 

During the draw period, homeowners are able to access cash. The money you borrow during this time establishes your balance. During this phase, homeowners have the option of paying the minimum monthly amount or only the interest on their HELOC balance. Some HELOC providers, like Hitch, offer a ten-year interest-only period to help homeowners manage their finances. 

Once this period comes to an end, the repayment period begins. Lasting anywhere from five to twenty — or longer — years, homeowners can no longer pull cash out of their HELOC and must make full monthly payments on both the principal and interest. 

Since different terms govern different HELOC offerings, speak to your lender about the exact expectations you should maintain. 

The biggest thing to keep in mind is that homeowners considering a HELOC need to make sure that they are prepared to meet the financial obligations related to their home equity line of credit in its different phases. 

Putting Equity to Work: 11 Things You Can Do with a HELOC

Here are eleven possible use cases for a HELOC: 

  • Home repairs and renovations
  • Covering medical expenses
  • Funding tuition payments
  • Financing a wedding 
  • Planning a family vacation 
  • Access cash to start a business
  • Fund investments
  • Consolidate debts 
  • Fund a down payment on a car 
  • Make a high-ticket purchase
  • Create a saving account 

HELOCs can be an empowering way to tap into your home’s equity, but you need to understand how these home loans work before pursuing one.

As you’re considering putting your equity to work for you as a HELOC, get in touch with Hitch to discuss your options and calculate your equity.

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Equal Housing Lender

Hitch, Inc. NMLS #2383367 #2383367

2158 NW Toussaint Drive. Bend, Oregon 97703

1. Qualified applicants may borrow up to 95% of their home’s value. This does not apply to investment properties.

2. HELOCs have a 10-year draw period. During the draw period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) the total of all accrued finance charges and other charges for the monthly billing cycle. During the draw period, the monthly minimum payments may not reduce the outstanding principal balance. During the repayment period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) 1/240th of the outstanding balance at the end of the draw period, plus all accrued finance charges and other fees, charges, and costs.The lender will calculate this amount by taking the outstanding Account Balance on the last day of the draw period and dividing it by 240 months and then adding any finance charge that accrues but remains unpaid during the monthly billing cycle plus any other fees, charges and costs to the fixed principal payment that is due. During the repayment period, the monthly minimum payments may not, to the extent permitted by law, fully repay the principal balance outstanding on the HELOC. At the end of the repayment period, the borrower must pay any remaining outstanding balance in one full payment.

3. The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Most borrowers get their cash on average in 21 days. The time period calculation to get cash is based on the first 4 months of 2024 loan funding's, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications. Closing costs can vary from 3.0 - 5.0%. An appraisal may be required to be completed on the property in some instances.

4. Not all borrowers will meet the requirements necessary to qualify. Rates and terms are subject to change based on market conditions and borrower eligibility. This offer is subject to verification of borrower qualifications, property evaluations, income verification and credit approval. This is not a commitment to lend.

5. The content provided is presented for information purposes only. This is not a commitment to lend or extend credit. Information and/or dates are subject to change without notice. All loans are subject to credit approval. Other restrictions may apply.