Home equity lines of credit provide borrowers with revolving credit that works similarly to a credit card. HELOCs are mortgage products that many banks and credit unions offer as first or second lien loans. People can increase HELOC limits either by applying for a loan modification increase or by paying off the existing line and replacing it with a new, larger one.
Most lenders do not allow borrowers to increase a HELOC within 12 months of establishing the loan. Banks normally need 30 days to process HELOC applications and line increases. Because banks retain HELOCs as portfolio loans, the underwriting process takes less time than on conventional mortgages where additional stipulations are required to meet the requirements of mortgage investors who buy the loans from the banks.
Banks use debt-to-income and loan-to-value ratios to determine the size of HELOCs. Most banks allow borrowers to have debt levels that equal 50 percent of their gross monthly income. Banks calculate HELOC payments for underwriting purposes by multiplying the line amount by 1.2 percent. Some banks use electronic appraisals to determine the values of homes but generally banks order a full appraisal of a house before writing a loan. Banks maximum LTV guidelines vary but range between 60 and 90 percent.
Loans with collateral typically have lower interest rates than unsecured loans because lenders have some recourse in the event of borrower default. HELOCs are more cost-efficient for major projects than credit cards. Additionally, the Internal Revenue Service allows people in certain income brackets to deduct mortgage interest payments from their taxable income. Tax savings make HELOCs more attractive than other loan types such as automobile loans that do not have tax benefits.
When you increase a HELOC, your interest rate for all future balances changes from your old rate to the rate offered at the time of the increase. Line amounts that exceed 80 percent of the home's value have higher rates than loans with lower loan-to-value ratios.
If you have an existing balance on a HELOC, you continue to pay the rate in effect at the time you used the money. Fixed rate portions of your line are not effected by line increases, either.
Most HELOCs have rates set at a particular margin to the U.S. Prime Rate. The Prime rate remains at a margin of 3 percent above the Federal Funds Rate. The Federal Open Market Committee must meet at least four times a year, but usually meet at least eight times a year and they can change the rate during their meetings. Neither the Federal Funds Rate nor the Prime Rate have a ceiling and although most HELOCs do, most have a maximum rate of 20 percent.