Introducing Prosper’s New eBook: 4 Ways to Use a Home Equity Line of Credit (HELOC)


Today we are excited to announce the release of our new eBook, 4 Ways to Use a Home Equity Line of Credit (HELOC), which is now available to download by clicking this link: 4 Ways to Use a Home Equity Line of Credit (HELOC) eBook.

Created to address confusion around HELOCs, this free resource covers everything you need to know, including:

  • What a home equity line of credit is and how it works
  • The advantages of a home equity line of credit
  • How to use a HELOC for home improvements, debt consolidation, major purchases and even as an emergency fund

You’ll also find links to other helpful resources, including Prosper’s easy-to-use HELOC calculator, throughout this 10-page guide.

To get your free copy of 4 Ways to Use a Home Equity Line of Credit (HELOC) today, follow this link. Not in the mood to download a file? We’ve got you covered. We’ve laid out the eBook content below, if you’d prefer to read it that way.

What Is a Home Equity Line of Credit (HELOC)? 

A home equity line of credit, or HELOC, is a revolving line of credit based on the equity you’ve built up in your home. A home’s equity is the difference between the value of your home and your mortgage balance. A HELOC works like a credit card but because the line of credit is secured by your home, you can access more money at a lower interest rate than a credit card or personal loan. Keep in mind that in exchange for the lower rate, your home acts as collateral for the line of credit. 

It’s also important to know that with a HELOC, there’s a defined draw period from which you can borrow (usually 5–10 years). Once the draw period ends, you enter the repayment period (typically 10–20 years).

How Should I Use a HELOC? 

In short, you can use the funds from a HELOC for any purpose. While home improvements are among the most common uses (remember: your home is the collateral for the HELOC), you may utilize your home equity to consolidate debt or finance a large expense. 

However, before you apply, it’s important to know what you want to use your HELOC for. Here are the four smartest ways to use a HELOC. 


RELATED ARTICLES 

What is a HELOC and How Does it Work? 

Home Equity Line of Credit vs. Home Equity Loan: What’s the Difference? 

Is a HELOC a Good Idea? Great Ways to Use a HELOC During COVID-19 

How a Fixed-Rate HELOC Works


1. HELOC for Home Improvements


While there are a number of ways to pay for your next home renovation project, as a homeowner with equity, a home equity line of credit (HELOC) may be the best way to finance your home improvements. Here’s why: 

A HELOC offers increased flexibility of funds, so you can use your credit when your projects are completed and invoices need to be paid. 

You’ll have less stress as delays and unexpected costs in house projects are common. With a HELOC, you can draw money when you need should costs and deadlines change. 

Not sure which projects you want to start on first? A HELOC allows you to gradually withdraw money to pay in stages, as the work is booked and completed. 

During the draw period, you may be given the option to make interest-only payments. 


RELATED ARTICLES 

HELOC: The Best Way to Finance Home Improvements 


2. HELOC for Debt Consolidation

Homeowners who are struggling with high-interest debt may be able to use their home equity to consolidate balances. A HELOC can offer you access to a larger sum of money as an option to consolidate your debt. Here’s why a HELOC could be useful for debt consolidation: 

Lower Interest Rates: A key benefit to a HELOC is you may be able to borrow money at a lower interest rate than you pay on your current debt. The lower the rate, the more you’ll save as you pay off your consolidated debt. 

One Easy Payment: Instead of keeping up with multiple payment due dates, consolidating your debt with a HELOC helps you manage it all with one easy monthly payment 


RELATED ARTICLES 

How to Use Home Equity for Debt Consolidation 


3. HELOC as an Emergency Fund 

5 If you’re in need of cash fast, a home equity line of credit may be your best solution as a homeowner. A HELOC may offer a variety of benefits when you need access to money quickly, such as when covering an emergency situation like a roof leak or medical bill. 

A HELOC allows you access to a revolving line of credit and usually, a HELOC offers a lower interest rate and a higher line amount than credit cards or personal loans. But it’s important to understand you are using your home as collateral. You have to be mindful to only borrow what you can afford to pay back. 


RELATED ARTICLES 

How to Improve Your Financial Health During COVID-19


4. HELOC for Major Purchases 

Need to make a major purchase, but you don’t have enough in your bank account to cover the upfront cost? A HELOC may help out in that situation. Because, as stated before, a home equity line of credit can provide you access to a large sum of money, depending on how much equity you have built in your home. 

Here are some big-ticket items a HELOC can help you cover: 

  • College
  • Car
  • Vacation
  • Wedding

RELATED ARTICLES 

Wondering What a HELOC Will Cost? Try Our HELOC Calculator


Conclusion

Now that you know the smartest ways to use a home equity line of credit, the next step is to figure out if it’s the right option for you. While there are many advantages to a HELOC, if you aren’t able to pay on time, your home is on the line. That’s why it is so important to assess your financial wellness and use the funds appropriately so you can pay back the amount you owe in the time allotted. 

If you feel certain a HELOC is right for you, you may want to check how much you can borrow using a HELOC calculator. From there, you can see how much you can borrow and begin the application process. 


RELATED ARTICLES 

How to Get a Home Equity Line of Credit (HELOC) 

HELOC Pros and Cons: is a Home Equity Line of Credit Right for You? 

Your Top 5 HELOC Questions Answered

How to Apply for a HELOC Online, Plus 5 Benefits of an Online HELOC

Ever wondered how to apply for a HELOC online? HELOC stands for a home equity line of credit, and it works much like a credit card with a credit limit based on the equity you’ve built up in your home and other information from your credit profile. A HELOC is secured by your home. A lender will approve you to borrow up to a certain amount (up to $1 million with an online HELOC through Prosper) depending on the equity you have in your home and your credit profile. As you pay back what you use, you can continue to borrow from your revolving line of credit.

Applying for a HELOC online may be easier compared to the traditional HELOC application process. You can apply from the comfort of home and receive the funds directly into your bank account. This makes an online home equity line of credit the consumer-friendly option for homeowners looking to use the equity they’ve built up in their home for renovations, debt consolidation or any other purpose. 

5 Reasons to Apply for a HELOC Online through Prosper

There are many reasons why an online HELOC could be your best option when looking to utilize and access the equity in your home. Let’s look at some of the reasons to apply for a home equity line of credit online.

1. Applying Is Easy

An online application may be easier compared to traditional paperwork and an in-person trip to the bank. It can be completed in minutes, from wherever you are, simply by entering some of your financial information, such as your estimated home value and remaining mortgage balance.

2. See Your Offer Instantly

Applying for an online HELOC allows you to see your interest rate and credit limit instantly, without impacting your credit score because Prosper doesn’t use a ‘hard pull’ credit inquiry to check rates. The hard pull happens if you accept your offer.

3. Submit Your Documentation Electronically

Whereas a traditional HELOC may require physical paperwork to be submitted and signed, applying for an online home equity line of credit allows you to upload your documentation and sign electronically. 

4. Apply from Anywhere

Whether you’re still in bed, working at your desk or on vacation, you can apply for an online home equity line of credit from anywhere. There’s no need to drive to a bank branch or ever meet face to face with a lender, making an online HELOC a convenient way to access the equity you’ve built up in your home.

5. Save On Closing Costs

Some online HELOC lenders choose to cover the cost of closing on your line of credit. At Prosper, BBVA pays the closing costs1 for lines of credit between $10,000 and $500,000. Depending on the size of your line of credit, with an online HELOC through Prosper, these bank-paid closing costs could save you a significant amount of money.

Read more: Here’s Everything You Need To Know About Home Equity

1 Closing Costs: BBVA will pay for all closing costs on new home equity products with amounts ranging from $10,000 to $500,000. Credit requests for less than $10,000 or more than $500,000 shall be subject to actual closing costs incurred and permitted by law. To qualify for Bank-Paid Closing Costs, the borrower must complete a $10,000 draw requirement within 30 days which must remain outstanding for 90 days (not applicable in Texas). Bank-paid closing costs are subject to recoupment from borrower(s) if loan is paid off within 2 years (not applicable in Texas). Closing costs vary by state and typically range from $675 on a $10,000 credit line to $11,114 on a $1,000,000 credit line. Texas closing costs typically range from $935 to $7,339 depending on credit line amount.

HELOC vs. Cash-Out Refinance: What’s the Difference?

The two most common options for accessing home equity are a home equity line of credit (HELOC) and a cash-out refinance. Let’s take a look at the differences between a HELOC vs. cash-out refinance and when each might make sense for your financial situation and specific needs.

With every mortgage payment you make, you’re building equity in your home. And equity equals ownership. Once you’ve built up a significant amount of equity, you’re able to access that money and use the funds for any purpose you wish. How you access your home’s equity, however, depends on your needs.

What Is a HELOC?

A home equity line of credit is revolving debt. Based on the value of and equity in your home, a HELOC works much like a low-interest credit card. Once approved (usually for an amount up to 90% of your home’s value minus any outstanding mortgage balances), you may draw on the line of credit and use the money however you’d like. For example, you could use your home’s equity to take a dream vacation or perform home repairs, consolidate high-interest debt or assist with retirement budgeting.

As you accumulate a balance on your line of credit, you will make repayments toward the interest and principal. The similarities with how a credit card works continue because as payments are made during the draw period, your principal balance will decrease, allowing you to borrow more money. 

It’s important to note that a HELOC exists separately from your existing mortgage, and comes with its own terms and repayment schedule. For this reason, a HELOC is often referred to as a second mortgage. It’s secured by your home, meaning that if you fail to make payments, you may risk losing your home.

What Is Cash-Out Refinancing?

In short, a cash-out refi is a new mortgage that pays off your existing mortgage, giving you your home equity as a lump sum of cash (via a check or direct deposit into your bank account). 

The result of a cash-out refinance is a brand new mortgage loan and likely different terms than your original mortgage. This means a different interest rate, new monthly payment amount and possibly a longer remaining loan term to pay off the new mortgage completely. 

A cash-out refi could be the way to go if you need a fixed amount of cash immediately and would like to maintain one mortgage payment. A cash-out refinance may also be best if you don’t believe that you have the discipline for a revolving line of credit, which is open to subsequent borrowing.

HELOC vs. Cash-Out Refinance

When it comes to deciding between a HELOC vs. cash-out refinance, consider how and when you intend to use the equity from your home, and how long you will need to pay it back. 

A HELOC is a secondary home equity loan product that is fluid in how you draw from it and how you pay it back. For example, if you don’t have a balance, there is no payment to make. This means that you will only have to pay back the portion of the HELOC you’ve used at any given moment. Typically, you’ll be able to draw from your HELOC over a 10-year period. After the draw period ends, the repayment period officially begins and you’ll no longer be able to withdraw from the HELOC. You will then have up to 20 years to repay the outstanding balance.

This is in stark contrast to a cash-out refi, which may immediately increase your monthly mortgage payment obligation for the next 10, 15 or 30 years. Let’s say your home is valued at $350,000 and your mortgage balance is $200,000. In this scenario, you have $150,000 of equity in your home, meaning you could refinance your $200,000 loan balance for $300,000, and receive the extra $100,000 in a lump sum. Your new mortgage will be for $300,000, and the interest rate and monthly mortgage payment will reflect that.

Key Features of a HELOC

  • Revolving debt to borrow and repay
  • Second mortgage with separate payment and interest rate
  • Payments due only on what you borrow
  • Variable payments during the draw period based on your line of credit balance (Payments may also vary if the HELOC has a variable rate feature including during the repayment period)

Key Features of a Cash-Out Refinance

  • Receive your home equity in a lump sum
  • Continue with a single, refinanced mortgage payment
  • Fixed payments
  • Longer terms may be available (for example, a new 30-year mortgage)

As you can see, there are several key differences between a HELOC vs cash-out refi. Before proceeding with either option you should consider your personal budget to determine what you can afford, and think about how and how often you will use the equity in your home. 

See How Much Equity You Can Borrow Today

When you’re ready, use our HELOC calculator to find out how much equity you may be eligible to borrow.

Read more

How to Get a HELOC with a Co-Applicant

If you’re a homeowner, you may have wondered how to get a home equity line of credit to access the equity in your home. While some may think that equity guarantees you access to a home equity line of credit, or HELOC, it does not mean you qualify for one. Learn more about what a HELOC is and how it works. In this post, we’ll cover how to get a HELOC with a co-applicant.

To qualify for a home equity line of credit, you’ll need more than equity in your property. Your current income level, credit score, and credit history all play a part. A lender may deny your HELOC application because of your income level or a red flag on your credit report.

While low income and poor credit could be roadblocks, there are ways to boost your HELOC approval chances. Here, we’ll cover how to get a home equity line of credit by applying with a co-applicant.

How to Get a Home Equity Line of Credit with a Co-Applicant

Your co-applicant, sometimes referred to as the co-borrower, is a trusted person who’ll share the liability for repaying your home equity line of credit. The co-applicant assumes equal ownership, payment and overall responsibility for the loan payments.

When considering how to get a home equity line of credit, you might seek out a reliable co-applicant with a solid credit history or a higher income than yours to improve your approval chances. Often, people choose to co-borrow with a partner or spouse to qualify for a larger loan than either one of the individuals could get on their own.

How a Co-Applicant May Help You Get a HELOC 

Having a co-applicant on a home equity line of credit application could benefit you as the borrower. A co-applicant with good credit could help a primary borrower with shakier credit get HELOC approval. A co-applicant may also help secure it at a lower interest rate. Not only that, you might be able to access more equity in your home by applying for a HELOC with a co-applicant.

If you’re thinking about how to get a home equity line of credit to consolidate debt or pay for home renovations, consider adding a trusted co-applicant to your HELOC application to increase your approval chances.

Read more: How to Get a Home Equity Line of Credit During COVID-19

Retirement Strategies: 3 Ways to Use a HELOC During Retirement

Conventional wisdom says that entering retirement with no debt is the goal when it comes to retirement strategies. Sure, that may be possible for some people, but there are other retirement strategies to consider should you find yourself in a different spot during your golden years. 

Before we get into the pros and cons of using a home equity line of credit, or HELOC, in retirement, it’s crucial to note that a HELOC is a secured form of credit. Specifically, it’s secured by your home. That means, if you fail to make your HELOC payments, you may risk losing your home. Keep this in mind when deciding if a HELOC is the right option for you. You should consult your tax advisor and/or attorney to understand the tax and legal implications of the strategies and financial products in this article.

Planning for Retirement as a Homeowner

Estimates vary, but some financial advisors posit that most people will need to have saved enough resources to spend between 55% and 80% of their preretirement income each year to maintain their current lifestyle and habits (like traveling and dining out) during retirement. Of course, not everyone will be able to accumulate that much wealth in a 401(k) or IRA. Having at least one large asset to utilize during retirement, like a (paid-off) home, could be beneficial. 

Here are 3 ways homeowners might consider using a home equity line of credit to prepare for, and thrive during, their retirement. 

1. Limit Pre-Tax Retirement Account Withdrawals

It’s likely that most, if not all of the money in your retirement plan is pre-tax. This means that when you withdraw those funds, you create a taxable event, increasing your taxable income every year in which you pull out retirement money. If you retire and draw money from your 401(k) or IRA before age 59 ½, you may also face an early withdrawal tax penalty. 

Using the equity in your home through a HELOC is one of the available retirement strategies that may allow you to leave some or all of your pre-tax retirement money untouched, at least for a period of time, while you lean on a HELOC to finance your expenses. This allows your retirement accounts to continue earning dividends and possibly grow in value.

Keep in mind, though, there are risks associated with a HELOC. The money you draw from a HELOC must eventually be paid back. Because the line of credit is secured against the equity in your home, you risk losing your home if you don’t make those HELOC payments.

2. Cover Unexpected Retirement Expenses

While accessing money from a home equity line of credit is not income, drawing from a HELOC is one of the retirement strategies that could help finance unexpected expenses, like medical bills or substantial home repairs, without drawing directly from your retirement savings nest egg to pay for the expense. 

If your social security, investment dividends, and/or pension payments won’t be enough to cover life’s inevitable emergencies during retirement, using the equity in your home at an interest rate typically lower than credit cards or personal loans may be an option to consider. With a HELOC, you can spread those payments out over time, rather than having to pay for the expense upfront.

3. Upgrade Your Home

Chances are, you’ll own your home outright by the time you reach retirement age. This not only means that you could have plenty of equity to tap into, but you may also be more inclined to stay put instead of selling, moving, buying a new home, and starting anew with another mortgage payment. 

Therefore, one of the retirement strategies in which a HELOC could prove helpful is to upgrade your home. Using the equity in your home to make it more accessible and comfortable could make your retirement years more enjoyable. After all, what better time than retirement to build that kitchen you’ve always dreamed of?

How a HELOC Works

Before making any decisions about how to fund your dream retirement, it’s important to understand all of your options when it comes to possible retirement strategies. While a HELOC may help some retirees finance expenses, make home improvements, and put off 401(k) and IRA withdrawals, using the equity in your home means taking on new debt, which doesn’t come without risks. Use this HELOC calculator to discover how much you may be able to borrow and what it will cost. 

Read More: Retirement Planning During An Uncertain Economy

This article is for educational purposes only; the information and strategies presented are not intended to be, and should not be considered, tax, financial or legal advice. The strategies mentioned in this article are general in nature and not directed to the specific objectives, needs, or tax or financial situation of any particular person. The financial products and strategies discussed in this article may have tax and legal consequences. You should consult your tax advisor and/or attorney to understand the tax and legal implications of the strategies and financial products mentioned in this article, and whether a HELOC makes sense for your specific financial situation and goals.  

HELOC vs. Second Mortgage: What’s the Difference?

It’s a common question, what’s the difference between a HELOC vs second mortgage? The short answer is, not a whole lot aside from verbiage.

A second mortgage is another loan taken against your property that’s already mortgaged. You’ll be borrowing again, not to buy a home this time, but against your home by using the equity you’ve built up by making your mortgage payments and/or that’s accumulated passively due to a potential increase in property value.

Mortgage vs Second Mortgage

Before we go further into the differences between a HELOC vs second mortgage, let’s examine how a first mortgage is similar and potentially unlike a second. Your first mortgage allowed you to borrow a large amount of money, in a single lump sum, to buy a home. In doing so, the lender will have placed a lien on your home which would allow them to seize the property should you not make your mortgage payments and/or default on that first mortgage.

A second mortgage is akin to the first in that once again a lien will be placed on your home but this time, only on the portion of your home that you’ve paid off and will borrow against — the equity you’ve built up that you’ll use as collateral for the second mortgage loan

With a second mortgage, you’re not borrowing to buy your home but instead, borrowing against the equity you have built up in your home. As with your original mortgage, the home will serve as collateral for the loan. It’s likely that multiple lenders will have liens against your home, one for the balance still owed on the first mortgage and another for the amount of home equity you have borrowed.

Why Consider A Second Mortgage?

A second mortgage provides you, the homeowner, with an influx of cash, for whatever purpose(s) that cash is needed. Maybe you want to consolidate credit card debt, pay off student loans or find the best way to finance home improvements. With a second mortgage, you may be able to access funds by borrowing against your home and using the equity you have accumulated in it.

The Difference Between a HELOC vs Second Mortgage

Now that you know how a second mortgage will differ from your first, and what you could do with the funds from it, let’s now take a look at the key differences when it comes to a HELOC vs second mortgage.

The difference, essentially, is language because your second mortgage will be processed as either a home equity loan or line of credit (HELOC). These are the two loan vehicles that can fund a second mortgage, and within the two there are differences.

Whereas a home equity loan will likely act similarly to your first mortgage, with a fixed monthly loan payment over a fixed number of years, taking a HELOC as your second mortgage offers the same kind of access to your home’s equity but with the added flexibility of making repayments only on the amount withdrawn from the line of credit. A HELOC also allows for continuous borrowing, as the amount accessible through the line of credit increases with each principal payment amount made.

The differences between a HELOC vs second mortgage may have been confusing but now you understand how the former can fund the latter. Find out more about how a HELOC works and how Prosper may help you access your home equity as a second mortgage.