What is a HELOC?

A HELOC is a home equity line of credit. It is a second loan, a revolving line of credit, secured by your house. Think of it like a credit card that is backed by your home equity, with a much lower rate than an actual credit card.

Why HELOCs are so popular right now

Most homeowners I talk to have a first mortgage in the 2.5 to 3 percent range. You do not want to touch that. If you refinance the whole thing to pull cash out, you give up that low rate on your entire balance. A HELOC lets you leave the first mortgage exactly where it is and borrow against your equity on a separate line.

How much can I borrow?

Most lenders go up to 80% combined loan to value. Here is a simple example. Say your home is worth one million dollars and your first mortgage is five hundred thousand. 80% of $1,000,000 is $800,000. Subtract your $500,000 first, and you have a $300,000 line of credit available.

How is the rate set on a HELOC?

A HELOC is a variable rate loan. Your rate is built from two pieces: a fixed margin the lender adds, and the prime rate, which moves. The margin stays put. The prime rate is what changes. As of today the prime rate is 6.75%, and it is common to see HELOCs priced right around there depending on your profile. Because the rate is tied to prime, if prime goes down your rate goes down with it, and if prime goes up your rate goes up. That is how a variable line works.

Why would I want one?

Look at what you are paying on other debt. Credit cards are running 23 to 29%. Some installment loans are in the 12 to 13%. A HELOC in the 6’s can be a much better place for that balance. You are moving high interest debt to a lower rate secured by your home.

You only pay interest on what you use

This is the part people love. On that three hundred thousand dollar line, you only pay interest on the amount you actually draw. If you take out one hundred thousand, the other two hundred thousand sits there available with no interest charged on it. You can borrow, pay it down, and borrow again. It is one of the most flexible tools out there.

What if I am on a fixed income?

Traditionally you qualify on your income with a full documentation loan. If you are retired or on a fixed income, that can be harder. The good news is qualifying has gotten easier, and there are bank statement programs that let you qualify a different way. If a standard income document does not fit your situation, we have options.

Give us a call and we will walk through whether a HELOC makes sense for you. As always, feel free to call me if you have any questions.

Manny Solana, California Home Solution | NMLS #291475 | NMLS #260091

Frequently Asked Questions

How much can I borrow with a HELOC in California?

Most lenders allow up to 80% combined loan to value. Subtract your existing first mortgage balance from that figure to estimate your available line.

How is a HELOC interest rate calculated?

It combines a fixed margin set by the lender plus the prime rate, which moves over time. The current prime rate is 6.75%.

Can I get a HELOC on a fixed income?

Possibly. Beyond full documentation loans, bank statement programs offer another way to qualify. Call to review your situation.