What Is a HELOC and How to Use It

HELOC is an acronym that stands for home equity line of credit. Once you know what it is and how to access it, you may find there are a variety of strategic ways you can use it. Our lenders are happy to answer your questions throughout your research phase and application process. Contact us if you’d like to talk with one of our experienced professionals.

To help you understand a HELOC, let’s first break it down into its core components: home equity and line of credit.

What is home equity?

Your equity is the portion of your property that you truly own. You can calculate your equity by taking the current market value of your home and subtracting the amount you still owe on your mortgage. For example, if your home is valued at $250,000 and you owe $150,000 on your mortgage, you have $100,000 in equity. (Scroll to the section below titled Evaluate your financial situation for a more in-depth understanding of your home’s market value and calculating your equity.)

What is a line of credit?

A line of credit is a flexible loan that gives you access to a set amount of money that you can use as needed. It’s similar in concept to a credit card in that you’ll only pay interest on the amount you use, making it a convenient and potentially more affordable option than other types of loans.

What is a home equity line of credit?

When you apply for a home equity line of credit, you’re asking a financial institution to help you turn your equity into revolving funds, or funds that you can use, pay back, and reuse for several years. The terms and repayment timeline differ depending on financial institution, and you’ll want to shop around and compare the best HELOC rates and benefits during your research phase.

With a HELOC from INTRUST, you can:

• Access up to 80% of your home’s appraised value, minus the amount you currently owe on your mortgage.
• Use the funds during the 10-year draw period (more on this later), including for home improvements, debt consolidation, or other major expenses.
• Use online banking to conveniently advance funds from your line of credit to your qualified INTRUST deposit account.
• Avoid certain fees, including an origination fee (processing fee) and closing costs.¹

Consider a research and pre-planning phase

To understand whether a HELOC is right for you, you may want to:

• Learn about the many ways people use HELOCs to help them accomplish their goals.
• Weigh the financial benefits and considerations of using a HELOC.
• Evaluate your financial situation and whether you’ll meet the qualifications for approval.
• Understand the draw period and repayment process.
• Gather the documentation you might need as part of the application and approval process.

Strategic ways to use a HELOC

Many people appreciate HELOCs for their lower interest rates compared to other forms of credit and the flexibility in how you can use the funds. Although there aren’t many limitations on the ways you can use it, some uses may offer more value than others. Here are a few:

High-return home improvements

High-return home improvements are those that not only enhance your living experience but may potentially increase the value of your property. According to industry experts, these could include kitchen remodels, bathroom renovations, energy-efficient upgrades, and additions such as a new bedroom or a functional outdoor space.

A HELOC can function as a loan to help you remodel your house without using your savings, potentially helping you maximize the return on your investment both in terms of property value and personal enjoyment. Before making remodeling decisions, consider speaking with professionals including your financial advisor, real estate professional, or mortgage lender about which home improvements could be right for you.

Debt consolidation

Debt consolidation involves combining multiple high-interest debts, such as credit card balances, personal loans, or medical bills, into one single loan with a lower interest rate. Using a HELOC to consolidate your debts can help you streamline your payments, lower the total amount of interest you pay over time, and simplify the path to paying down debt.

Life occasions and celebrations

Perhaps your teen just finished their driver’s ed course and is rapidly approaching the age when they’ll get their license and need a vehicle. This is an exciting — but often expensive — milestone, and you’ll likely want to research affordable ways to finance the vehicle. Depending on what interest rates look like for traditional financing, a HELOC may be one option you consider.

Bridge financing

Bridge financing is short-term funding that covers immediate expenses or helps manage the gap between two financial transactions, like buying a new home before selling your current one. A HELOC can be a strategic way to accomplish this, giving you the extra funds you need now to make a down payment or cover other costs associated with buying the new place. You can then pay it off once you receive the funds from the sale of your current home.

Weigh the benefits and considerations of a HELOC

Although there are many benefits of a HELOC, there are also a few aspects you’ll want to consider, including that the line of credit is secured by your home. If you are unable to make payments during the repayment period, you may risk losing your home. Considering the benefits and risks, in combination with evaluating your financial situation, may help you better understand if a HELOC is right for you. If you have questions or need the perspective of a professional, contact us or visit a banking center. We’re happy to help.

Benefits of a HELOC

• Typically offers lower interest rates compared to other types of credit.
• Flexibility in how you can use the funds.
• Extended draw period and longer payoff period than other types of credit.

Aspects to consider

• Risk of foreclosure if you can’t pay back what you use.
• Variable interest rates can increase your costs over time.
• Requires sufficient home equity to qualify.
• Potential for overspending due to easy access to funds.

Evaluate your financial situation

Before applying for a HELOC, it can be good to assess your finances. This will help you understand whether you’ll qualify and whether you can comfortably manage and pay back the debt, both right now and during the repayment period (more on this later).

Here are a few steps your financial assessment might include:

Home health

• Research comparable sales in your neighborhood to estimate your home’s current market value. You can do this by browsing homes online that recently sold near you. While only a formal home appraisal completed by a licensed appraiser will give you an accurate valuation, browsing nearby home sales online can help you arrive at a rough estimate without having to prematurely pay for an appraisal. (An appraisal may be required during your HELOC approval process, and you can contact our lending professionals ahead of time to understand if this applies to you.)
• Know your outstanding mortgage balance (the amount you still owe). You can find this information on your mortgage statement or through the online portal for your mortgage servicer.
• Calculate your home equity as both a dollar amount and a percentage. Lenders typically require you to have at least 20% equity in your home to be eligible for a HELOC.

• Calculate your loan-to-value (LTV) ratio by dividing your mortgage balance by your home’s value. This number matters because it can affect whether you qualify and how much you can borrow.

• Use our HELOC calculator to estimate your credit limit. (Be sure to leave the LTV ratio at 80. This will give you the maximum amount you could potentially borrow.)

• Understand your combined loan-to-value ratio (CLTV). This is the ratio of your total secured loan balances (your mortgage and your potential HELOC) to the total value of your property. To qualify for an INTRUST HELOC, we require you to have a CLTV of 80% or less. For example:
  • $150,000 (outstanding mortgage balance) + $30,000 (HELOC) = $180,000 (total secured loan balance).
  • $180,000 (total secured loan balance) / $250,000 (total value of your property) = .72 or 72% (CLTV).

Credit

• Review your credit report. You can get one free credit report per year from each of the three major credit bureaus. Reviewing this information ahead of time can help you avoid surprises when the lender looks at it as part of the HELOC application process.

Expenses and income

• Review your income, expenses, debts, and savings. This will help ensure you have a clear understanding of your financial stability and capacity to manage additional debt.

Understand how repayment works

A HELOC has two phases: the draw period and the repayment period. Understanding both is key to using a HELOC effectively and keeping your finances in check.

The draw period

This is when you can use your funds. You can borrow money up to your credit limit, and during this time, you’ll only be required to make a monthly interest payment on what you borrow rather than being required to make a full monthly payment. Additionally, you can use, pay back, and reuse your funds as many times as you want during the draw period. That’s one of the many benefits of a revolving line of credit.

The repayment period

After the draw period ends, the repayment period begins, and you can no longer use your line of credit. At this point, you’ll be required to make full monthly payments, meaning you’ll need to pay both the principal amount plus interest. It's important to plan for this phase to make sure you can handle higher payments. At INTRUST, you’ll have 15 years to pay back your HELOC balance.

At this point, you'll have an amortized loan, meaning you'll make monthly payments that are calculated based on the balance you owe and your interest rate. Consider planning ahead for the repayment period to make sure you're prepared for the higher monthly payments.

It's important to keep in mind that your interest rate is variable, meaning it can increase or decrease over your 15-year repayment period, causing your monthly payment amount to fluctuate.

What you’ll need to apply

When applying for a HELOC with INTRUST, you'll need to prepare some information and submit documentation to ensure a smooth process. Here’s a list of what you’ll need:

• Proof of income: This can include pay stubs, tax returns, and other documentation that shows your current income.
• Property information: Details about your property, including its value and any existing liens.
• Debt information: A comprehensive list of your current debts, such as loans, credit cards, and other obligations.
• Personal identification: Valid identification documents such as a driver’s license or passport.

How to apply

Easily and securely apply for a HELOC online in minutes. You can also visit the nearest INTRUST banking center to apply in person. No matter how you apply, we’re committed to providing a fast, friendly experience.

Remember, comfortably taking on a HELOC often requires a thorough understanding of the tool and identifying a strategic purpose that makes sense for your budget and life circumstances. If you have questions, we’re happy to help. Contact us today.

1. Unless an appraisal is necessary, which may result in a fee ranging from $0 to $1,000 and an appraisal vendor fee ranging from $0 to $55.00.