What is a USAA HELOC?
Even if you have a good-sized emergency fund saved up, you still may encounter an expense that you don’t have enough money on hand to pay for. But if you have accumulated any amount of equity in your home, then you may be able to tap into it and convert it to cash with a home equity line of credit. These versatile home loans can benefit you in many ways. Read on to find out more about how these lines of credit work and how they can help you in a time of need.
How HELOCs Work
Home equity lines of credit are one of two loan types that homeowners can access the equity in their homes. The other way is with a home equity loan. In this article, we will explain HELOCs. This type of loan pays the borrower a lump-sum of money up front, and the borrower starts making interest and principal payments on the entire balance immediately after closing.
Home equity loans are fixed-rate mortgages that charge fixed rates of interest and their payments never change. Neither type of loan requires a down payment.
HELOCs are issued by banks, credit unions, private lenders and other financial institutions. They are available in every state in the U.S., including Texas, New York and Alaska. They are one of the more innovative mortgage products on the market today, as they allow homeowners to tap into their home equity without having to refinance their entire home.
But HELOCs allow the borrower to draw out funds as needed, using either a book of checks or some sort of debit card. (They can also access their funds by calling the lender or appearing in person at one of the lender’s branch locations.) The borrower will only pay interest on the amount of the line of credit that is actually drawn.
Most home equity lines of credit have a maximum loan-to-value ratio of 80 to 85 percent, although some lenders will go as high as 90 or even 100 percent, depending on various circumstances. After this ratio has been computed, then the lender will subtract the amount of any first mortgages or other liens on the house.
The amount remaining is generally the maximum loan amount that the HELOC can reach.
The lifespan of a HELOC can be divided into two separate periods. The draw period is the period of time during which the borrower can access the funds in the line of credit. This period usually lasts for 5 to 10 years. During this period, the HELOC may allow the borrower to make both interest and principal payments or interest-only payments.
Then there is the repayment period, the period during which the borrower must repay the outstanding balance of the HELOC and cannot draw out any more money. Some HELOCs require that the entire balance due be paid at the end of the draw period in one lump sum. The repayment period usually lasts from 10 to 20 years.
At this time, USAA does not offer home equity lines of credit. But they offer many other types of mortgage loans, and USAA mortgages are among the most competitive in the industry. But they are only available to current or former U.S. military members and their families. The rates that they charge are often on par with VA loans or FHA loans.
Qualification & Requirements for a HELOC
Borrowers who apply for a HELOC must usually undergo the same underwriting process as borrowers who apply for a first mortgage. The lender will need most of the same information from the borrower, such as:
- Name and contact information
- The borrower’s home value
- Condition of the property the line of credit will be taken out against
- The borrower’s total monthly debts, including mortgage payments
- The borrower’s last 30 days of pay stubs
- The borrower’s last 2 W2s, if a salaried employee
- The last 2 years of the borrower’s tax returns
- Social Security or other retirement income benefit declaration letter
- A complete list of liquid assets
- A complete list of real estate holdings, including mortgage information
- A copy of the homeowner’s insurance policy
- A copy of any relevant trust documents
- The borrower’s credit score and credit history
- Details on any other mortgages or liens that are held against the property
Once the lender has all of the information that it needs, it will make the decision to either approve or reject the loan. If the HELOC is approved, then the lender will arrange a time for the property to be appraised.
In some cases, the appraiser may need to conduct an inspection of the inside of the property as well. Then they will verify that the title deed to the house is valid and in good order. Once those items are done, then they will set a closing date and time. The borrower must sign the closing paperwork and produce a valid picture ID.
The funds will generally become available at least four business days after the closing date. Borrowers are granted a 3-day right of rescission under current laws after they sign the paperwork. Then the draw period for the HELOC begins.
If the borrower wants to increase the credit line of the HELOC, he or she will have to go back through underwriting all over again to get a new HELOC with a new account number.
Typical Interest Rates
All home equity lines of credit charge an adjustable interest rate that is tied to a major financial index. Most HELOCs are tied to the Prime Rate, a major index that is published on a daily basis in The Wall Street Journal. Then there is usually an additional amount added on, which is how the lender makes its money on the loan.
Many HELOCs offer a lower teaser rate for the first year of the loan, then a higher rate after that. And many lenders also allow borrowers to transfer some or all of their outstanding HELOC balance over into a fixed account in order to protect themselves against rising interest rates.
Pros & Cons
The biggest advantage that HELOCs provide is the freedom to spend the funds that are drawn against the line of credit on anything the borrower wishes. Medical and dental expenses, education fees, automotive expenses and home improvements are some of the more common expenses that HELOCs are used for. And interest that is charged by a HELOC for home improvements is also tax-deductible under the new tax laws.
Another major advantage of HELOCs is that while their mortgage rates are variable, they are still much cheaper than carrying credit card debt or personal loans. For this reason, HELOCs can be ideal vehicles for debt consolidation loans.
Finally, HELOCs usually come with no origination fees and no closing costs.
One of the disadvantages of HELOCs are that the interest they charge on any expense other than to build, buy or improve the property against which the line of credit is secured is now nondeductible under the new tax laws.
But the biggest drawback of a HELOC is that if the borrower becomes unable to make the monthly payments on the loan balance, then the lender can foreclose on the property, leaving the borrower homeless.
Borrowers who choose the interest-only payment option during the draw period may also get a rude surprise when the draw period ends and the repayment period begins. Now the borrower must begin paying back the principal of the loan as well, resulting in a higher monthly payment.