Skip to content
let's talk

How Does a Home Equity Line of Credit (HELOC) Work? A Complete Guide

How Does a Home Equity Line of Credit (HELOC) Work? A Complete Guide

A Home Equity Line of Credit (HELOC) allows homeowners to borrow against the equity they have built in their property. This flexible financing option can be used for renovations, debt consolidation, education expenses, major purchases or other financial needs.

What Is a Home Equity Line of Credit?

A HELOC is a revolving line of credit secured by your home’s equity. Unlike a traditional loan where you receive a lump sum, a HELOC allows you more flexibility on the timing and amount of your draws. Note that our HELOC requires you to make a 75% draw at closing, and every subsequent draw must be a minimum of $1,000 or a state-required minimum.

  • Equity Definition: Home equity is the current market value of your home minus your outstanding mortgage balance.
  • Example: If your home is valued at $400,000 and you owe $200,000 on your mortgage, you have $200,000 in equity. You may be able to use a portion of this equity through a HELOC, but not the entirety.

How Our HELOC Works

Our HELOC operates this way:

  • Draw Period (3 years): For the first 90 days following your first draw, you are not permitted to make additional draws. Following this 90-day period, you can withdraw funds up to your approved credit limit.
  • Interest-Only Period (3 years): Runs concurrently with your draw period. You are only required to repay interest.
  • Repayment Period (17 years): You can no longer draw funds and must repay your principal plus additional interest accrued.

Most HELOCs carry a variable interest rate tied to a benchmark (ours is based on the Prime Rate published in the Wall Street Journal®), meaning payments can fluctuate over time.

Key Benefits of a HELOC

  1. Flexibility: Borrow what you need up to your available credit limit during your draw period.
  2. Revolving Credit: Borrow and repay funds over time.
  3. Potential Tax Benefits: Interest may be deductible if used for home improvements (consult a tax advisor).

Qualifications for a HELOC

We evaluate several factors before approving a HELOC:

  • Sufficient Equity: You will need to have built up some equity before you can pull from it.
  • Credit Score: Strong credit scores may improve approval odds and lower rates.
  • Debt-to-Income (DTI) Ratio: DTI should be under 43%.
  • Employment and Income Stability: Proof of consistent earnings is required.
  • Payment History: On-time payments show financial reliability.

The HELOC Application Process

  1. Prepare Documentation: Gather income statements, mortgage details and identification.
  2. Underwriting and Appraisal: We will assess your financial profile and order a home appraisal.
  3. Approval and Closing: If approved, you’ll sign documents (often with a notary). Our HELOC product requires you to make a 75% draw after the closing process.

Find Out if a HELOC is Right for You

If you need cash to reach your goals, using your home’s equity might be a good way to get what you need. A HELOC provides you with the flexibility to make draws when you need during the draw period. Contact us today to learn more.

 

 

The Wall Street Journal® is a registered trademark of Dow Jones & Company, Inc.

This HELOC is an open-end line of credit, available on owner occupied properties, where 75% of the approved full credit limit (minus the origination fees) will be drawn at the time of closing. Additional draws may be available after a 90-day period within the first 3 years not to exceed the available credit limit. Actual rates available to you may vary based on several factors including your credit score and combined loan-to-value. Loan amounts range from $50,000 to $350,000. We may determine home value and resulting equity through independent data sources and automated valuation models. An appraisal may also be required. Only available for eligible borrowers and property types. Not all applicants will be approved, pre-approval is based on data you have provided and certain assumptions that must be verified and subject to underwriting approval. Not available in all states or territories. Contact Newrez for more information.