What Is a HELOC Loan?

A home equity line of credit (HELOC) can be a flexible financial tool for homeowners. But is it the right option for you? At The Harvard State Bank, we’re dedicated to helping you make confident financial decisions by providing clear, straightforward information.

Understanding the Basics of a HELOC

A HELOC allows you to borrow against the equity you’ve built in your home—the difference between your home’s value and what you still owe on your mortgage. It functions as a revolving line of credit, giving you access to funds as needed, up to your approved limit.

Think of it like a credit card backed by your home—but typically with lower interest rates since your home is used as collateral.

How Does a HELOC Work?

A HELOC has two main phases:

Draw Period: Typically lasting 5 years, this is when you can borrow funds as needed up to your credit limit. You’re generally required to make interest-only payments during this time, although you can pay down the principal too. This flexibility makes it ideal for ongoing expenses like home renovations.

Repayment Period: Once the draw period ends, you can either renew your HELOC or start repaying both the principal and interest, usually over a repayment term 10 to 20 years, depending on your loan agreement.

Smart Ways to Use a HELOC

While you can use HELOC funds for almost anything, it’s smart to use them for expenses that improve your financial future or increase your home’s value, such as:

• Home improvements or renovations
• Consolidating high-interest debt
• Covering education costs or major unexpected expenses

Since your home secures the loan, using funds wisely is important.

How Much Can You Borrow?

Your borrowing limit depends on your home’s value, your outstanding mortgage balance, and the lender’s borrowing guidelines—typically up to 85% of your home’s equity. Here’s a simple formula:

(Current home value × Lender’s borrowing percentage) – Outstanding mortgage balance = Maximum borrowing amount

For example, if your home is valued at $300,000, your lender allows 85% borrowing, and you owe $200,000, you could borrow up to $55,000.

Variable vs. Fixed Interest Rates

Most HELOCs have variable interest rates tied to the prime rate, which can change over time. However, many lenders, including The Harvard State Bank, offer options to convert part of your balance to a fixed rate—providing stability if rates rise.

Costs to Consider

Understanding the costs associated with a HELOC helps you plan ahead:

• Closing Costs: Typically 2%-5% of the loan amount.
• Annual Fees: Some HELOCs include annual fees, though we strive to keep fees low and transparent.
• Rate Adjustments: Variable rates can rise, increasing your monthly payments.

HELOC Qualification Requirements

Lenders typically require:

• A credit score of 660 or higher
• A debt-to-income ratio below 40%
• At least 15% equity in your home

Before applying, review your finances to ensure you meet these qualifications.

Is a HELOC Right for You?

A HELOC can be a powerful financial tool—but it’s not for everyone. Here are some scenarios to consider:

When a HELOC Makes Sense:

• You’re planning major home renovations to boost property value.
• You want to consolidate high-interest debt.
• You have stable, reliable income and a clear repayment plan.

When to Think Twice:

• Your income or financial situation is uncertain.
• You plan to sell your home soon—you’ll need to pay off the HELOC at closing.
• You’re considering using it for everyday expenses instead of long-term investments.

Partner with The Harvard State Bank

At The Harvard State Bank, we’re here to help you decide if a HELOC aligns with your financial goals. Our team of local experts is ready to guide you through every step, ensuring you make the best choice for your future.

Contact us today or visit one of our local branches to learn more. Let’s achieve your financial goals—together. After all, we’re Your Friends in Banking.