A home equity line of credit, or HELOC, is often called a second mortgage, because it lets you borrow against your home’s equity. It’s a line of credit that’s secured by your home.
Are you considering getting a HELOC to pay for a home improvement project, school tuition, or other expenses? Here’s what you should know before you decide to apply:
A HELOC Works Similarly to a Credit Card
A home equity line of credit is different than a home equity loan. While a home equity loan gives you a lump sum of cash, a HELOC works more like a credit card. It gives you access to money that you can borrow from whenever you want, so you only have to pay interest on what you actually withdraw from your line of credit. Like with a credit card, you can only borrow up to a certain amount -- your credit limit.
That limit is typically determined by the value of your home.
Your Home’s Equity Determines the Amount You Can Borrow
If you’re curious about how much cash a HELOC would get you, you can start by looking at the value of your home. Here’s how it works:
Lenders determine how much credit to give you access to based on a percentage of the value of your home. This percentage is also known as loan to value (LTV). For example, at Valley Credit Union we offer home equity lines of credit and home equity loans up to 90% LTV. Having a good credit history can help a lot when it comes to getting a high LTV ratio on your loan.
Lenders don’t just need to know what your home is worth, though. They need to know how much of it you currently own, which is your home’s equity. Your home equity is your home’s current market value minus what you still owe on the mortgage and other liens. At the end of the day, it’s your home equity that will determine your credit limit.
Interest on a HELOC Is Sometimes Tax-Deductible
As of 2018, the interest you pay on a home equity line of credit is only tax-deductible if you’re using your HELOC to “buy, build, or substantially improve” the home that you’re using as collateral.
For example, say you use your line of credit to add a room to your current home, and then you borrow from the same line of credit to pay for a new car. Interest on the portion used to add to your home will be deductible, but interest on the portion used to pay for your car won’t be.
This is why HELOCs are often ideal for financing home improvement projects. But also know that you can choose to use your line of credit for whatever you wish.
Valley Credit Union Offers HELOCs with Great Benefits
We love helping our members get approved for home equity lines of credit or home equity loans, with terms including:
- Up to 90% of loan to value (LTV)
- No pre-payment penalties
- Variable or fixed rate
- Rate discount available with auto pay from a Valley Credit Union checking account
- Minimum payment 1% of the outstanding balance monthly
- 10 year draw period with a 10 year repayment period
- Low processing fee and annual fee
Have more questions about HELOCs?
If you’re considering a home equity line of credit and you’re still not sure if it’s the right choice for you, we can help! We always put our members first, and we would love to discuss your financial goals with you, look at your options, and walk you through the process of getting and paying off your HELOC. Contact us today to get started.
About the Author
Justin Roberts, Vice President of Lending
Justin Roberts is our Vice President of Lending and has been in the financial industry for over 18 years. He is an Oregon State University Graduate and has just completed Western CUNA Management School. When he is not focused on helping the members at Valley, you will find him coaching his two sons and volunteering his time to help develop the youth in our communities through sports.