What I learned about HELOCs while working at a bank as a personal banker
I was a personal banker for 6 years total. I worked for different financial institutions. Within my years of experience, I learned quite a bit about a Home Equity Line of Credit (HELOC) that I have found valuable. My goal is to share them with you, so that they can be of value in your own personal financial life.
From my experience, very few of my clients knew much about banking, basic personal banking principles, let alone Home Equity Lines of Credit. A HELOC is one of the most valuable products that a bank can offer when it comes to lending. Personal bankers have been trained to communicate this product and push this product to their clients. Before you go and apply for one, let’s go over what I have learned about Home Equity Lines of Credit.
What is Equity?
Equity in the most simplest form, is the difference between what your appraised home is worth and the balance that you owe on your property. For example: If your home is worth $200,000 and you owe $100,000 to the bank for your home, then you have $100,000 in home equity. This equity sits within the life of your home and continues to fluctuate depending on how the housing market is going and as you pay down the balance of your home.
Does Everyone Have Equity?
I have had scenarios where a client is interested in the product, however, they did not have equity on their home just yet. If they do have equity there needs to be sufficient. All banks have a loan to value percentage (LTV%) requirement. This means that out of the available equity that you do have, they can only lend you a specific percentage of that available equity. By visiting your local banks and sitting with a personal banker, you can get more information on this. Now that we have gone over equity, let’s go over a HELOC.
What is a HELOC?
A home equity line of credit (HELOC) is a revolving line of credit that is secured by your home. The banks offer this product to potential qualifying clients. The easiest way I like to explain a HELOC to my clients, is to picture it as a giant credit card. Using the prior example above, if you have $100,000 of available equity, the banks will lend anywhere from 70-85% loan to value (LTV). This translates into a possible $85,000 line of credit available to you if you can qualify. You can borrow from this line of credit, pay back, and borrow again. Just like a credit card.
A HELOC typically has a draw period of 10 years. Meaning after 10 years, if you still have a balance, you enter a repayment period. You then would need to re-apply to get access to anymore cash. Except, with a HELOC you have access to cash money, at a significantly lower interest rate in comparison to a credit card cash advance or personal loan. The access to lower interest rates is because you are using your home as a collateral. This secures the bank. Different banks offer different terms that you will be able to have this line of credit available to you.
Different banks offer different options to their clients. It would be a great idea and highly recommended that you shop around. All banks pretty much offer the same products. The difference is in the customer service and in the options that are available to all of those products. Sticking to a HELOC, you often get terms such as 5, 10, 15, 20, & 30 years. It’s important to get an understanding of what terms you could be dealing with when entering an application for a home equity line of credit. With these types of terms you can plan out a feasible repayment period for money that you could possibly have from this line of credit.
Fees & Penalties
If you end up sitting down with a good, honest, banker then you are in good hands when it comes to fees and penalties that are associated with HELOCs. A good banker can help you move around fees and penalties. If you aren’t so fortunate, at least you can take a little information from here that should help you to feel more secure.(not crazy about wording) There are fees and penalties associated with home equity lines of credit. Before you go and apply ask a banker for the home equity line of credit disclosure. Every bank should have one in place, if they are offering this option to their clients. This disclosure will break things down for you in more detail.
The first thing to be made aware of is, that your home is being used as collateral. This means, if you were to default on your payments, your home could be in jeopardy. In addition, there are penalties such as if you were to close out your home equity line of credit before a specific term of time, the bank can charge you fees and penalties. More often than not, its the closing costs and a penalty that you may have to pay back.
Some banks charge fees if you do not draw from the line of credit (take money out). Other banks charge an annual fee for just having a line of credit. These are just some of the possible fees and penalties. Make sure to do your research and talk with your banker before you move too quickly.
Is a HELOC worth it?
This is a two way street. Unfortunately, there is no clear cut answer for everyone. Everybody’s financial situation is completely different. If you have your finances in order and you have a strong discipline with yourself then I would say yes, a HELOC is a great option to pull some quick cash whenever you may want it. Maybe you want to make an improvement on your home, or you want to take that money and invest it in another property or a business. You may just want the HELOC as an emergency backup.
Depending on your credit score, you could get some amazingly low interest rates on your HELOC. Low interest rates, coupled with a great term can really add some financial flexibility to a lot of people. I have helped many different clients with their financial health simply by leveraging this product. I have had some real success stories, helping people get out of debt and saving them money on their overall monthly payments. However, there is a flip side, a “down side”.
The Down Side
As great as a HELOC sounds, there are some things that you need to look at from a different angle. This is where a good, honest personal banker comes into play for you. A HELOC is a 2nd Mortgage. What does this mean? This means that you have 2 liens on your property. It is as serious as going and purchasing another property. Now, you have 2 serious payments that need to be made. This is not a credit card payment penalty. This is now your home. If God forbid, something were to happen to you financially, and you cannot make these payments, you can incur serious consequences. You should take this into consideration.
Something else to consider, is longer time to pay off your home. Taking out a HELOC, you are increasing your debt, if you were to tap into it. If you have a HELOC and you do not use it, then there is no debt. If you decide to tap into it and pull $40,000, you now are increasing the time before your home is paid off in full. You need to add up what you owe on your first mortgage plus your new second mortgage (HELOC).
A personal goal for myself is to pay off my home as soon as possible. There is a lot of controversial views on this, but from what I have learned and seen in banking, our goal is to get rid of the mortgage payment as quick as we can and not add to it. The sooner this property is paid, the sooner we can work on a second property without having to use a primary home as collateral. The equity now becomes a piggy bank.
My Home is Paid. Should I get a HELOC?
If your home is free and clear and a HELOC would add some financial security for you incase of an emergency, then I would look into this option. I helped a lot of clients that had their home paid off and having a HELOC was more of an advantage for them, rather than a potential liability.
One thing to keep in mind here, is that if your property is paid, you may not be required to have a home owners insurance policy on your property. The moment you receive a conditional approval, you now may be required to purchase home insurance policy and keep it throughout the life of the new loan. If you remove the insurance after you are approved, I have seen banks force place insurance and that never ends well for your pocket.
The average household credit card debt today in America hovers around $6,000 – $10,000. That is just the average. Working at the bank, I saw households who were $20-$40,000 in credit card debt. If you are in heavy credit card debt, don’t panic. This can be turned around believe it or not. It just requires some sacrifice, self-discipline and time.
If you have the income high enough to support this debt in the banks eyes, you could possibly qualify for a HELOC. If you can qualify, you can take a HELOC and use it to payoff all of your credit card debt. Yes, you are transferring this over to your home which can be seen as a downside. However, there is an upside. HELOCs have way better repayment terms and interest rates. You can save yourself quite a bit of money here on a monthly basis, which could help you to repay that debt back sooner. It’s worth considering.
How do I qualify for a HELOC?
Every bank is different. I highly suggest shopping around and doing your homework. In shopping around, if you find a personal banker that you really like, a good idea would be to return back to that banker and allow them to walk you through the whole process. Sometimes, a great banker is more valuable than the little perks some other bank can offer you.
A bank will typically look for a few things before approving a client for a HELOC. They will first look at what your overall financial picture looks like. How many credit cards do you have, how much money do you owe and do you typically carry outstanding balances. They look for a solid credit score. This can vary between banks, but from my experience anything over 700 is considered good to qualify. However, due to the pandemic, banks are more stringent with their minimum credit score requirements. Last I saw, 720 or higher was the minimum credit score requirement for banks that are lending during the pandemic.
In addition to your credit score, banks will require proof of income. You will need tax returns and last two paystubs in order to prove sufficient income is present to repay the loan. Lastly, you will need to pass debt to income % (DTI). This is where many clients get declined. The bank will take your gross income and divide it by your monthly debt payments. If your DTI is over 50%, from my experience, you will be declined.
How quickly can I get a HELOC?
A typical HELOC process from start to finish, usually can take about 30 days. If you have a solid personal banker, I have personally seen them close in half the time. It really depends on the personal banker you choose to handle your process. Once your HELOC is approved and you sign your closing contract, by law clients get a 3 day revision period. During these 3 days, you can decide if you want to pull through with your end of the bargain. If you change your mind you can go back and cancel. You get 3 days to do this after you sign your closing contract.
This is a lot of information to handle in one sitting. It took me years to get it down packed. However, I wanted to share because there are a lot of people out there who never get the real scoop on some of these banking decisions. I have seen people make some innocent mistakes all because they didn’t know. I hope that something here is of value to you and can help you down your path towards financial confidence.