What is a HELOC?

HELOC behaves as the mortgage version of a credit card.

It’s like a credit card because you’re given a credit limit and you can borrow, repay and borrow and repay again as often as you want up to that limit. And you pay interest (mostly at a variable rate) each month only on your then current balance.

However, a HELOC is better than a credit card for a few reasons. Most importantly, its interest rate is likely to be a fraction of a card’s.And you’re under no obligation to pay back any of your balance until you’re ready to do so. Your minimum payment is purely the interest for that month.

 

How soon can I get a HELOC after purchasing a house?

You can apply for a home equity line of credit (HELOC) the minute you close on your house purchase, without any legal or regulatory waiting time.

For people who’ve owned their homes for several years or for decades can apply immediately. However, those who have more recently become homeowners can find it an unsurmountable obstacle to home equity borrowing due to some practical issues caused by CLTV “Combined loan-to-value ratio”

And in this article, we’ll explore those issues so you’ll know when you can get a HELOC.

“The average U.S. homeowner now has more than $274,000 in equity — up significantly from $182,000 before the pandemic.” — Selma Hepp, Chief Economist for CoreLogic, June 2023

What is CLTV “Combined loan-to-value ratio”?

HELOCs and HELoans both are forms of second mortgages. And that means they’re secured on your home. However, lenders of mortgages and second mortgages have strict rules about the proportion of a home’s market value that can be secured borrowing.

Often, HELoan lender requires an 80% CLTV. That means all your borrowing secured by your home — your first (main) mortgage plus any second mortgage(s) —i.e. all your mortgages together can’t exceed 80% of the home’s market value.

Home equity is the inverse of CLTV. It’s the amount by which your home’s value exceeds your mortgage balance. So, an 80% CLTV means a 20% equity stake. And a 90% CLTV means you have 10% equity.

How do you calculate how much equity you have?

Suppose you’re buying your home now and it’s worth $300,000. And let’s assume you’re making a 20% down payment.

That down payment would be $60,000 ($300,000 x 20% = $60,000). So, your mortgage balance would be $240,000 ($300,000-$60,000 or 20% = $240,000).

So, you’d have 20% equity, which means an 80% CLTV.

Let’s see how does your CLTV move?

Once you bought home, there are more than obvious chances that the home prices will appreciate. Hence, rising home prices would mean your home’s market value increases and with monthly payment of your mortgage emits your mortgage balance will reduce as per amortization chart.

Naturally, those will change your CLTV. Indeed, there are times when it could change daily.

Let’s continue with our earlier example. Suppose home prices increased 20% during your first year of owning the home. The home’s value would increase to $360,000 ($300,000 + 20% = $360,000).

And your mortgage balance would reduce by perhaps $2,356 that year as a result of your monthly payments. Read about amortization to discover why most of your monthly payments in the earlier years of your mortgage go on interest.

So, your CLTV would be calculated based on a home value of $360,000 and a mortgage balance of $237,644. That’s $237,644 ÷ $360,000 = 66% CLTV. Looked at another way, your home equity would be 34% (66% + 34% = 100% of your home’s value).

In those circumstances, you could borrow a HELoan or HELOC that would take your CLTV up from 66% to the 80% cap. That’s 14% of your home’s market value (80% – 66% = 14%).

We know that the value is $360,000. And 14% of that is $50,400, which is the amount you could borrow. ($360,000 x 14% = $50,400).

How soon can I get a HELOC? It mostly depends on how quickly home prices are rising

After witnessing a striking rise of nearly 20% in home prices, recently we have witnessed a slow growth in home prices. For example, according to the Federal Housing Finance Agency house price index, they increased by 3.1% during the year ending April 2023.

Naturally, the slower home prices rise, the longer it will take for you to build equity in your home. And, to answer our original question, “How soon can I get a HELOC?”, that will take longer, too.

The more you free up your mortgage balance the higher HELOC you will be entitled for. That also means if you pay up upfront to  reduce your principal and free your mortgage balance that also lowers your CLTV.

It’s not always an 80% CLTV cap

One more thing on this topic. Most HELoan lenders prefer an 80% CLTV. But you might find one that’s a bit more flexible; 85% CLTVs are fairly common.

However, HELOC lenders tend to be easier going. And you might be able to find one of these lines of credit with a CLTV as high as 90%.

Thus, the with time your HELOC gets a higher share with rising home prices  and monthly mortgage payments resulting in better home equity.

Tapping a HELOC or HELoan are among the least costly ways of borrowing.

Most of those average homeowners qualify for a HELOC or HELoan. They could get their money in roughly two-to-six weeks.

However, those who became homeowners in recent years may have to wait to qualify. That’s because they need enough home equity to secure their new borrowing while leaving an equity cushion to protect their existing first mortgage.

“Thanks for reading this article and for a hassle-free experience of purchase/sale of a home feel free to get in touch”.