Do you live in California and want to take a Home Equity Line of Credit (HELOC)? This article will give you an insight on where to start and how to go about the whole process. Let’s get started.
What is the Home Equity Line of Credit (HELOC)?
Home Equity Lines of Credit, or HELOCs, are open-ended, revolving loans that allow future advances up to the approved credit limit. Much like credit cards, they offer cash when it is needed with flexible payment options during the draw period. The draw period of a Home Equity Line of Credit is the amount of time the line of credit is open for, usually ten years, after which the balance must be paid.
Advances taken out during this draw period may have small monthly payments in which only minimal amounts are paid toward the principle with the rest of the payment going to accrued interest, or interest-only payments may be made. At the end of the draw period, many plans have balloon payments in which the monthly payments will drastically increase to cover the rest of the balance due or the entire balance may be due immediately. There are plans that offer repayment of the Home Equity Line of Credit loan over a fixed period of time after the draw period has ended.
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California Home Equity Line of Credit Interest Rate
The Interest of Home Equity Lines of Credit is usually variable and tied to the Prime Lending Rate, the rate at which most major banks charge their largest and most credit-worthy customers. These variable rates usually have a cap to limit how high of an interest rate can be charged and some have limits as to how low the interest rate can get. Variable rates are subject to quarterly adjustment though some plans offer a fixed interest rate. The interest paid on Home Equity Lines of Credit is only paid when the funds are used and is usually tax-deductible.
Like Home Equity Loans, Home Equity Lines of Credit have fees that may be charged for taking out the loan. Some plans call for one-time; upfront fees while others have annual fees. Plans that offer low monthly payments during the draw period may require a balloon payment at the end of the loan period requiring the entire remaining balance to be paid. Other fees can also apply such as appraisal fee, credit check fee, and closing costs. The Federal Truth in Lending Act protects the borrower by requiring the lender to inform the borrower of all costs and terms when the application is given.
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California residence taking out a Home Equity Line of Credit has the option of whether or not to allow outside and affiliate companies to have access to their private financial information. Through the California Financial Information Privacy Act, the lender can only disclose financial information about California residences with other companies if it is mandatory in securing the loan. Any other use of the information is at the borrowers’ discretion.
Home Equity Line of Credit Requirements
Just like the Home Equity Loans, the Home Equity Line of Credit has requirements that have to be met in order to access it and these vary from one lending company to another. Below are what you will basically need if you want to apply for a Home Equity Line of Credit:
- A Reliable Income: Many lending companies will need proof of income to confirm that you will be able to pay off your loan payments.
- A Good Credit Score: A credit score above the mid-600s will likely approve you for a loan. A credit score above 700 is considered ideal.
- Qualifying amount of equity in your home: You should have at least 15 – 20% home equity.
- Responsible payment history: Lenders may evaluate your previous payment history to make sure you haven’t made any late payments in the past.
- A low debt-to-income ratio (DTI): The lower your DTI, the better. Discuss with your lender what their qualifying DTI ratios are to potentially receive a loan.
READ MORE: Benefits of Taking a Home Equity Loan.
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