What Does HELOC Stand for and Everything Else You Need to Know

What does HELOC stand for? Who may qualify for one? And why did HELOC counts increase by 30% just last year? 

This small acronym could have a huge impact on your home and your financial situation, so we’ve compiled some of the basics for new and veteran homeowners alike. 

Read on for: 

• What does HELOC stand for? 
• What is a home equity line of credit (HELOC)? 
• Potential Pros and cons of a HELOC 
• How you may be able to get a HELOC 

What Does HELOC Stand For? 

Whether you’ve owned your home for a while or just recently purchased, you may have heard this common acronym and found yourself wondering, “what does HELOC stand for?” 

When it comes to real estate and home finance, HELOC stands for home equity line of credit. As such, you’re most likely to hear your mortgage professional using this term, though real estate agents and even other homeowners may also bring up HELOCs. 

What is a Home Equity Line of Credit (HELOC)? 

A home equity line of credit, or HELOC, is an open line of credit often used for intensive or longer-term home improvements. This might include a renovation of multiple rooms or any other project where the scope or cost could vary. But that’s not a HELOC’s only use. Here are some potentially beneficial ways to use a HELOC: 

• Home improvements – especially those that can help increase what your home is worth 
• Pay down debt – when the interest rate on the HELOC is lower than that of other existing loans 
• Fund higher education expenses – when the interest rate on the HELOC is lower than alternative educational loan options 
• Pay medical or other unexpected costs – when the interest rate on the HELOC is lower than alternative credit or loan options 
• An emergency fund – just because you qualify for a HELOC doesn’t mean you need to use the proceeds. Some might find it useful to have access to a HELOC… just in case. 

HELOCs may allow owners to borrow against their existing home equity on a regular, ongoing basis. This is opposed to more traditional cash out refinance mortgage loans, where borrowers might receive one lump sum as a payout. Essentially, with a HELOC, owners can, subject to the terms and limitations of the HELOC, borrow what they need, when they needed it. 

It’s important to note, though, that you can’t necessarily go wild. Each borrower will have a unique, pre-determined limit that they may borrow up to as well as a limited time in which to borrow the money. In most cases, the amount may be capped at 85% of the home’s value minus any outstanding mortgage payments. 

Like a more traditional loan, you should expect to pay interest on a HELOC. These lines of credit often come with variable interest rates, so don’t be surprised if your repayment amount changes depending on the month.  

Also keep in mind that, as you are borrowing against your equity, your property will be used as collateral. That means that you must have a complete understanding of the terms and conditions related to your specific HELOC program. As the stakes will be raised upon default, you’ll want to ensure that you have a solid repayment plan. A home finance professional and knowledgeable real estate attorney can help clarify any confusing aspects. 

Potential Pros and Cons of a Home Equity Line of Credit (HELOC) 

HELOCs certainly aren’t for everyone, and you should never feel pressured to pursue one if it doesn’t seem like a fit. That’s why it’s critical to weigh the pros and cons before making a commitment. 

Some pros to consider include: 

• Reasonable interest rates. APRs for HELOCs tend to be on the lower side. This is especially true when you compare them to the rates of credit cards or certain personal loans. If you need cash and want to pay less over the life of your loan, a HELOC may be the way to go. 
• Tax deductions. One of the biggest benefits of receiving a HELOC lies in the fact that any interest you pay throughout the year could qualify as tax-deductible. 
• Savings. Homeowners may have the freedom to borrow the exact amount they need, up to a point. This could help with savings goals or cut down on unnecessary interest payments. 
• Flexibility. In many cases, your repayment options aren’t set in stone. Be sure to speak with a home finance professional about terms, processes and more. 
• Credit implications. Believe it or not, taking out a HELOC and using the funds to pay off other lines of credit can actually boost your credit score. That’s because the number of open accounts in your name is weighed in when calculating your score. 

One the other hand, some cons to consider include: 

• High stakes. Putting your home up for collateral can be risky. If you have a history of defaulting or trouble paying your bills, a HELOC might not be right for you.  
• Fluctuations in cost. HELOCs often have variable interest rates, which means your APR could look different from one month to the next. That means that your required repayment amount may change, too. Some owners might want more predictability than a HELOC can provide. 
• Flexibility. Sometimes freedom is a double-edged sword. With a HELOC, borrowers are allowed to make interest-only payments during what’s called the draw period, which is the window you have to take out funds. This flexibility can lead to overspending or lack of planning, if you’re not careful. 
• Reduced equity. Of course, if you’re borrowing against your home equity, it could diminish the equity in your home over time.  

How to Potentially Get a HELOC 

If you feel like you have a good understanding of the basics and identify with at least some of the pros, a HELOC could be a good solution. The process for seeking a HELOC is fairly straightforward. 

Start by review the qualifications, which include: 

• At least 15-20% home equity. Think of equity as the difference between what your home is worth and how much you owe on it. In other words, newer homeowners are unlikely to meet this requirement, but a home finance professional can help clarify. 
• A credit score at least in the mid-600s may be required. You may be able to qualify with a minimum credit score of 620, but in general the higher your credit score the better, and some lenders may prefer a score of at least 700.  
• A debt-to-income ratio (DTI) of 43% or lower. Calculate your DTI by adding up your total monthly recurring expenses (including mortgage payments, interest, taxes, insurance, HOA dues, and more) and dividing that figure by your gross monthly income (including base salary amount, commissions, bonuses, and any other income sources). 
• Sufficient income. Not all lenders have clear income requirements when it comes to a HELOC, so work with a home finance professional to determine whether you may meet this requirement. 
• A reliable repayment history. Double-check your payment history on your recurring debts to ensure there are no errors or issues. If you have missed payments in the recent past, perhaps hold off on pursuing a HELOC right now. 

If you believe you may qualify, and are interested in getting the ball rolling, schedule a meeting with a home finance professional. A mortgage loan originator can answer any relevant questions, compare and contrast different lenders and help you find the best option overall. 

Your Helpful Guide to HELOCs 

For new and veteran homeowners alike, the concept of a HELOC may seem a bit overwhelming at first. Plus, like any large financial decision, obtaining a HELOC is not to be taken lightly. That’s why understanding the basics, ensuring your situation is applicable and talking things through with a home finance professional are critical. 

Then, if all goes well, happy borrowing!