Home Equity and HELOC Strategies Flashcards
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Read the first 7 Home Equity and HELOC Strategies flashcards as text
What is the typical maximum combined loan-to-value (CLTV) ratio most lenders allow when approving a HELOC?
Answer: 90%
Most lenders permit a CLTV of up to 85–90%, meaning the total of all mortgages cannot exceed that percentage of the home's appraised value.
How does a HELOC differ from a home equity loan in terms of interest rate structure?
Answer: HELOCs carry a variable rate; home equity loans typically carry a fixed rate
HELOCs are almost always tied to a variable index (typically the Prime Rate), while home equity loans generally offer a fixed interest rate for the life of the loan.
What is the 'draw period' in a HELOC?
Answer: The window in which the borrower can access funds up to their credit limit
The draw period (commonly 5–10 years) is when the borrower can withdraw funds up to the approved credit limit, usually making interest-only payments.
During the repayment period of a HELOC, what typically happens to the borrower's monthly payments?
Answer: Payments increase because principal repayment is now required
Once the draw period ends, the repayment period begins and the borrower must repay both principal and interest, which causes monthly payments to rise significantly.
Which scenario best illustrates a prudent use of a HELOC as a financial planning tool?
Answer: Consolidating high-interest credit card debt at a lower interest rate
Using a HELOC to consolidate high-interest debt can lower the overall interest rate paid, improve cash flow, and potentially provide a tax benefit on the interest.
What happens to an outstanding HELOC balance when the homeowner sells the property?
Answer: The outstanding balance must be paid off at closing from sale proceeds
A HELOC is secured by the home, so the lien must be satisfied at closing; the outstanding balance is repaid from the net sale proceeds before the seller receives equity.
Under the Tax Cuts and Jobs Act (TCJA), HELOC interest is deductible only if the funds are used for which purpose?
Answer: Buying, building, or substantially improving the home securing the loan
Post-TCJA, HELOC interest is deductible only when the loan proceeds are used to buy, build, or substantially improve the taxpayer's qualified residence that secures the loan.