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Is a HELOC a Mortgage?
If you are thinking about getting the money from your property without selling it, you may consider taking a loan against your equity, and one of the possibilities you have is a HELOC. But is a HELOC a mortgage, and what are the terms and conditions of taking this loan? Keep reading and find out.
Is a HELOC a mortgage? A Home Equity Line of Credit or HELOC is a type of loan you can take from your home equity. It could be considered a mortgage since the home is the guarantee you will pay off your loan. That is not the same thing as a home equity loan.
HELOC is in many ways similar to the mortgage on one hand, while on the other, it has many similarities to a regular credit. Find out all about the HELOC and how to apply for one.
What Is a Home Equity Line of Credit?
When you apply for a mortgage, you get money from the lender to purchase the home. That is basically the first mortgage you have on your property. If you finance the down payment, you will, in essence, have no equity in your home. But in time, once you start paying your loan, this will change, and as much as you pay, the bigger the equity will be. The equity is a difference between what is owed in the home mortgage and the property’s current value on the market. And in time, you can take a HELOC based on the amount of money you have in equity.
Difference Between Home Equity Loan and Line of Credit or HELOC
If you need a large amount of cash at your disposal, whether for home improvement, weddings, or purchasing a new home, you can take a home equity loan from your bank. With a home equity loan, you will get a lump sum payment at a fixed rate. You will have monthly rates you need to pay in order to return this loan. And if you wonder how quickly you can pay off your mortgage, this loan is usually issued for 5 to 10 years.
On the other hand, HELOC is a credit you can take from a bank secured by your equity. Once you get approved for a loan, the money will be at your disposal to use whenever you need it, usually on your Visa credit card. This type of loan comes with an adjustable interest rate. Here are the differences between HELOC, home equity loan, and cash-out refinance.
| HELOC | Home equity loan | Cash-out refinance | |
| Interest rates | Adjustibile | Fixed | You can choose between fixed and adjustable |
| Description | The second loan based on your equity | Second mortgage based on your equity | New mortgage replaces the old one. |
| Downside | Variable payments can be challenging | Interest rates can be high | You will end up paying more at closing costs. |
Who Can Take HELOC? Find Out Criteria You Must Meet
Once you are approved for a mortgage, and you already have paid some part of your debt, it is usually easier to get approved for HELOC, and you will probably get better rates and lower fees. If the amount of money you owe on your home is less than the value of your home, you can apply for HELOC. Usually, people borrow up to 85% of the value of their home minus the amount they owe. Also, the lender will check your FICO, debt-to-income ratio, and other financial statements, just like when you applied for the first mortgage. Here are the criteria you need to meet:
- Reliable income,
- Good credit score, above 700,
- Qualifying amount of equity,
- Good payment history,
- Low DTI.
How Do You Pay Off a HELOC?
The moment your lender gives you approval for HELOC, you will have money at your disposal. Usually, there will be a ten-year draw period to spend it. After this period is over, you will have to make both principal and interest payments. The repayment period is usually 5-10 years. In HELOC’s draw period, your monthly payments will be based on the amount of the balance and the variable interest rate. After you pay off the debt, the money will be available on your account for usage again. Just like credit cards.
Is a HELOC a Mortgage?
As you can see, there are many similarities between a home equity loan and HELOC, and many do consider this to be a second mortgage. But on the other hand, it works a lot like credit cards, and you can choose how much you will spend each month. And like with credit cards, it can be easy to spend the money you can not return easily later on. In this case, if you don’t make payments on time, your home equity will be in danger, and in the end, the lender will take your equity to repay the debt. So before you take any of these loans, consider your options carefully. Maybe the better option is to refinance than to take HELOC. Either way, it is up to you to decide. Make sure you take into consideration adjustable rates you will have to pay alongside other expenses.
