A HELOC (Home Equity Line of Credit) gives you the flexibility to borrow against your home equity.
As property values in Hawaii grow, a surplus of equity in your home is also growing and available.
Of course, it doesn’t make sense to refinance the entire balance of your existing mortgage unless you are sitting at a high rate. If you have a lower interest rate on your existing home loan though, tapping into the existing equity with a Home Equity Loan may make the most sense to help you cover larger expenses.
HOW A HELOC WORKS
Like a credit card that allows you to borrow against a limit in increments and as many times as needed, a HELOC works much the same way.
- For example, your home is valued at $1 million and you have an existing mortgage on your home with a $500,000 balance. You’re approved for a HELOC with an 80% LTV (loan-to-value) of your home’s equity. You can be approved for a HELOC with a limit of up to $125,000 dependent on your creditworthiness (the extent to which a person is considered suitable to receive monetary credit based on their credit score).
- $1,000,000 (estimated home value) x 80% (Loan-to-Value or LTV) = $800,000
- $800,000 (80% LTV of your estimated home value) – $500,000 (existing mortgage balance) = $300,000 (you possible line-of-credit)
To set your rate, typically a financial institution will set their rate dependent on what is the prime rate (a rate set by the Federal Reserve) at the current time. Most HELOCs have variable interest rates. Variable means the rate will go up or down with the market. As a result, variable rates leave you vulnerable to rising interest rates so be sure to take this into account.
Sometimes you can catch a special promotional fixed rate or opt for a fixed rate option. A fixed rate is where the Annual Percentage Rate (APR) does not change for a specific period of time (often called term).