HELOAN Terms & Tips
A HELOAN (Home Equity Loan) is a form of second mortgage that provides you with a strong and reliable option to meet your financial goals. HELOANs may be used for home renovations, or really any significant expense like travel, education, medical needs, etc. As a borrower, you always want to approach a loan as informed and prepared as possible.
THINGS TO KNOW WHEN APPLYING FOR A HELOAN
HELOAN (Home Equity Loan) vs. HELOC (Home Equity Line of Credit)
First, you’ll need to decide if you need to borrow a one-time lump sum or if you will need access to funds over time. A HELOAN is a fixed interest rate, lump sum loan where you will receive all the proceeds at one time and repay the balance plus interest back over the life of the loan. A HELOC is a variable-rate loan that provides you with a line of credit you can access during the draw period while paying monthly payments based on the balance throughout the life of the loan.
What is Equity, Exactly?
Both the HELOAN and HELOC availability will be based on your home’s equity.
Most lenders will loan up to some defined LTV (Loan to Value). To calculate how much you may be able to borrow, begin with estimating your home’s value. There are online tools available to assist you in getting a general idea, but most lenders will require an appraisal to determine the home’s actual value in the market. Then you would apply the lender’s LTV limit. In the case of a maximum LTV of 80%, you would multiply 80% by the total value of the home to determine the amount you might be eligible to borrow. Next you will take the value of your home and subtract any outstanding mortgage balances owed on the home. This could be your primary first mortgage and possibly an existing second mortgage. This number will represent the equity you have in your home.
Subtracting the amount of equity in your home from the maximum LTV will determine how much you can potentially borrow. Here’s a more concrete example:
Let’s say you have a home worth $120,000 and a mortgage of $50,000. Using an 80% LTV puts us at $96,000 (your value of $120,000 x 80), and we subtract that outstanding mortgage amount for a total of $46,000 in equity available for a loan ($96,000 – your $50,000 mortgage).
There may be other limits based on credit rating, etc., but this simple calculation will give you a general idea of how much of your home’s equity might be available for a HELOAN or HELOC.
Your HELOAN has Closing Costs
Don’t forget about closing costs! Total closing costs will depend on your HELOAN total, though funds from your loan can cover this charge. Keep closing costs in mind when you calculate how much you wish to borrow. One advantage to getting your home equity loan from FFCCU is that we pitch in on those closing costs. We’ll cover up to $500 in closing costs when you borrow a minimum of $10,000, and up to $800 in closing costs when borrowing $50,000 or more.
Check your credit before applying
An applicant’s credit history and score do have an impact on both approval chances as well as the interest rate paid. Before making an official application, it is always a good idea to check your credit and make sure everything on your credit report is accurate. Cleaning up any issues before applying will serve you well. You can obtain a personal credit report free of charge by going to freecreditreport.com.
HELOAN TERMINOLOGY
While home equity loans aren’t as rife with tricky terminology as a first mortgage might be, there are still some acronyms and terms you will want to be familiar with.
Amortization
An amortization schedule spells out how much you will pay over the life of your fixed-rate home equity loan. It specifies what amount goes towards interest versus principal. It typically curves over time, with a greater amount going towards the principal in the later life of the HELOAN.
Closing Costs
As we mentioned above, a HELOAN comes with a variety of closing costs. These include things like credit verification, home appraisal, title search, and document preparation.
DTI (Debt to Income Ratio)
This is determined by taking all of your monthly debts (this would include a new HELOAN) and dividing by your monthly gross income. This percentage is a benchmark that lenders will use to decide if a borrower appears capable of reasonably paying on their new loan. Typically, your DTI needs to be under 40% for strong approval chances, but this can vary by lender.
Lien
A lien is the lender’s stake in the value of your home. In terms of home equity loans, the first lien would be your mortgage itself, with the second being your HELOAN. When a loan is paid in full, the lien is then released.
LTV (loan to Value)
This ratio is your outstanding mortgage balances divided by the value of your home. This allows a lender to determine how much of your home’s equity might be available to borrow on.
ARE YOU READY FOR THE NEXT STEP?
Not all HELOANs and HELOCs are created equal. We encourage you to shop around and make well-informed decisions. Of course, we believe our offerings are top-notch and we are anxious to help you to achieve your financial goals. I encourage you to visit ffcommunity.com/home-equity-loans to see rates, estimate your payment, and apply. If you still have questions, please reach out to any friendly teammate, as we’re always happy to help! You can contact FFCCU through the chat button (bottom right corner of your screen when you visit ffcommunity.com) or text/call us at 216.621.4644.
Posted In: Lending
