Your greatest asset as a homeowner is the built-in equity of your home that can be leveraged as a proverbial gold mine. A home equity line of credit, or HELOC loan, is a popular loan for borrowers looking for flexibility over an extended period of time to fund whatever life events may come their way — from home renovations to college tuition to starting your own business, and more. Find out more about the advantages and disadvantages of a HELOC loan and how you can determine monthly payments that will allow you to comfortably pay off your obligation.
What is a HELOC Loan?
A HELOC loan is a type of second mortgage that allows you to secure low-cost funds using your home’s built-in equity. With a HELOC loan, you can use your home’s built-in equity to secure your own line of revolving credit. There are two stages to a HELOC loan: the draw period and the repayment period. During the draw period, you are able to cyclically borrow against and repay the credit amount available to you. It’s called “drawing,” because you draw from the loan throughout this part of the term. Once the draw period comes to an end, you will enter the repayment period whereupon the HELOC loan must be repaid in full.
For example, let’s say you have $20,000 you are able to take out from your home’s equity on a 30-year HELOC loan term with a ratio of 10 years to draw and 20 years to repay the loan. During the first year of your HELOC loan, you decide to borrow $10,000 to do a home renovation project (which means you now have $10,000 available to you from your line of credit). You get an end-of-the-year bonus and decide to pay back $8,000 on what you have taken out, which means you have $18,000 worth of funds available to you on your HELOC loan. During the 6th year of the draw period, your firstborn’s college tuition is due, so you borrow $7,000 from the loan, leaving you with $13,000 available in your line of credit. During this initial period, you are able to borrow against and repay your line of credit. Once the 10-year borrowing period ends, you are obligated to repay the total outstanding amount on your line of credit (which in this case is $7,000).
What Inputs are Needed to Determine my HELOC Payoff Schedule?
A HELOC Payoff Calculator is a useful tool in determining how much you need to put towards your monthly payments to repay your HELOC loan. Fill in the inputs below with the information that is accurate to the best of your ability to find out how long it will take to pay off your line of credit and how much you should put towards it each month.
- Current Balance. This is the current outstanding balance on your line of credit.
- Interest Rate. This is the annual interest rate set for your line of credit.
- Change in Interest Rate. Similar to an ARM loan, a HELOC’s interest rate fluctuates in alignment with market trends. For this input, fill in how much you expect the interest to change in the next year. If you expect the interest to decrease, input negative numbers.
- Payoff Goal. This is the term in which you aspire to have your HELOC loan paid off. Enter the number of months by which you wish to have your loan paid off for this input.
- Current Monthly Payment. This is the amount you currently contribute each month towards paying off your HELOC loan. Be sure to enter the amount you actually pay each month (not the minimum payment). This figure is used to determine how long it will take you to pay off the balance on your line of credit.
- Additional Monthly Charges. This input is for the total in new charges you plan to put on your line of credit per month.
- Annual fee. This value represents the annual fee you pay to have your line of credit open.
Once you have calculated these inputs, you can start to create a financial plan of action that will keep you on track to repay your HELOC loan through more manageable monthly payments.
What Should I Be Aware of When Choosing if a HELOC Loan is Right for Me?
While HELOC loans are a great financial resource that can offer you flexibility, it is important to be aware of their variable interest rates. This means that the interest rate moves in alignment with the market, and typically resets annually or semi-annually. If you are interested in a similar refinance arrangement with a fixed interest rate, you should check out a home equity loan, which gives you one lump-sum amount that should be repaid over the life of the loan. A cash-out refinance may also better suit your financial needs as a homeowner.
A HELOC loan uses your home as collateral, so be sure you have the financial stamina to repay your loan or you could become vulnerable to foreclosure if you default on your loan. Furthermore, the bank will pre-determine a borrowing limit for your loan. The limit issued on your line of credit is based upon an analysis of your property’s appraised value minus the amount owed on your mortgage. Your verifiable income, debts, and credit history may also be factored into establishing your credit limit approval.
How Can The Home Loan Expert Help?
The Home Loan Expert got its big break by helping homeowners in neighboring communities become aware of refinancing opportunities available to them that would put them in a better position financially. Since then, we have been able to expand our services nationwide to get homeowners like you the best deal possible on a loan. Our friendly lending experts come from the same communities they serve, so we are familiarized with our client’s needs.
We will work with you to come up with a financial plan of action that specifically caters to your unique financial situation and homeownership goals. We work quickly to make the loan application process as painless as possible, with an efficient underwriting process that can get you approved on a loan in as little as two weeks. A HELOC payoff calculator is a great tool when initiating the evaluation process of how to pay off your line of credit through feasible monthly payments. We understand that you may have questions or concerns that are “outside of the box.” So give us a call today at (866) 221-1926 to speak with one of our friendly and knowledgeable lending Experts. Or, you can reach out to us through our online chat service to find out how you can determine affordable monthly payments on your HELOC loan.