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HOME EQUITY LOANS AND LINE OF CREDIT (HELOC)
Home Equity Loan
Home equity loan is a type of loan that allows you to borrow money against the equity you’ve built up in your home.
Here’s a simple breakdown
WHAT IT IS
- Your home equity is the difference between your home’s market value and what you still owe on your mortgage.
- A home equity loan lets you use that equity as collateral to borrow a lump sum of cash. This can be either a first mortgage or a stand alone 2nd mortgage keeping your first interest rate. *If the current first mortgage is a home equity loan a new request for cash out loan would be issued paying off the current loan.
HOW IT WORKS
- You receive one lump-sum loan up front.
- You repay it with fixed monthly payments (principal + interest) over a set term (usually 5–30 years).
- Interest rates are typically fixed, meaning your payment doesn’t change.
If you fail to pay, the lender can foreclose on your home since it’s used as collateral.
EXAMPLE
If your home is worth $400,000 and you owe $250,000 on your mortgage, your equity is $150,000.
A lender might allow you to borrow up to 80–90% of that equity (depending on credit, income, and lender policy), so you could get a loan for around $120,000.
Common Uses
- Home renovations or repairs
- Debt consolidation
- Major purchases (college, medical bills)
- Investment property down payment
Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) is a type of revolving credit that lets you borrow money against the equity in your home — as needed — instead of all at once.
Here’s how it works
A HELOC uses your home as collateral, similar to a home equity loan, but instead of getting a single lump sum, you receive a line of credit you can draw from — like a credit card — up to a set limit.
HOW IT WORKS
- The lender gives you a maximum credit limit (based on your home’s equity, income, and credit).
- You can draw funds as needed during the draw period (usually 5–10 years).
- You make interest-only payments on what you actually use during that draw period.
- Afterward, the repayment period begins (often 10–20 years), where you repay both principal and interest.
- The interest rate is usually variable, meaning it can go up or down over time.
EXAMPLE
If your home is worth $400,000 and your mortgage balance is $250,000, your equity is $150,000.
If your lender allows up to 85% combined loan-to-value (CLTV), your maximum total borrowing is $340,000.
That means your HELOC credit line could be about $90,000 ($340,000 – $250,000).
*Texas rule allow 80% Loan to value