Applying for HELOC? Ask These Questions

I recently completed renovations on my primary residence (look out for a detailed post on my live-in flip process), and applied for a Home Equity Line of Credit (HELOC) on the home. 

I interviewed 11 banks and credit unions combined. Overkill, I know, but by the end of the process I was a HELOC professional. Here are the questions I asked. Hopefully this saves you the time it took me to come up with this list.

What loan-to-value (LTV) do you offer?

As part of the HELOC process, lenders will set up an appraisal and loan you a percentage of your home's appraised value. A 90% LTV was most important to me, so I lead with this question. 

Do I need to have an account with you?

This question ended up not being important in my search. Most banks need you to have an account with them in order to carry out transactions associated with the HELOC. These accounts are usually provided at no to minimal cost. 

What is the application cost? Is there an annual fee? What is the appraisal cost? 

These questions are pretty straight forward. Some lenders have application costs and annual fees, some do not. As for the appraisal cost, most lenders will cover the cost of an initial, automated appraisal. If this appraisal comes in too low, a full appraisal (someone coming to your house) can be ordered at your cost. This will run you between $300 and $500. For me it was worth paying for the full appraisal because the majority of my renovations were inside the house, undetectable to the auto appraisal. 

What are your closing costs? Does the bank cover any closing costs?

Lenders will generate closing costs determined by the amount of the loan. Some will charge you while others will cover the costs up to a certain amount. My lender ended up covering $800 of closing costs. 

How long is the daw period?

The draw period is how long you can use the line of credit before either closing the account or reapplying. It is also the term of the loan at which point the balance becomes due. All of the lenders I spoke to had a 10 year draw period.

What is the interest rate?

The interest rate for the HELOC is determined by the prime rate. In addition, some banks will charge a margin, or a particular rate in addition to the prime rate. Prime plus a .25 margin was common amongst the lenders I interviewed, in which case (since the prime rate at the time was 5.5), your interest rate would be 5.75%.

Do you offer a fixed rate option? 

Some lenders give you the option of converting (at a cost) part or all of the balance of the HELOC to a fixed rate loan. To me this served as a back up plan for the worse case scenario of not being able to repay the HELOC in the time I wanted to.

Is there an interest rate floor?

An interest rate floor ensures the lender is paid a minimum regardless of fluctuations in the prime rate. The lowest I came across was a 2.99% floor, guaranteeing the lender this rate even if the prime rate dipped below 2.99%.

What is the final cap on the interest rate? Is there a yearly cap on the interest rate?

In contrast to the floor, the cap is the highest the interest rate can climb in a specific period of time. Most were capped at 18%. Some could only increase certain percentage points per quarter, not to exceed a particular rate each year. These, of course, were the most attractive to me.

Any prepayment penalties? Fees for closing out the line of credit early?

This was pretty standard across the board. If the lender paid your closing costs, you would have to reimburse them their payment if you closed the account within the first 2 or 3 years. You are allowed to carry a $0 balance, as long as you keep the account open. A few of the lenders did not have any prepayment penalties.

Do you offer interest only payments? If so, for how long and what happens after that period ends?

I was attracted to interest only payment HELOCs in order to keep my cash in hand. I am planning to BRRRR, so I have a plan to repay the debt long before the draw period ends. I ended up getting a HELOC with interest only payments for 10 years, after which the balance becomes due.

Is there a balloon payment?

Yes. This usually occurs at the end of the draw period. 

Are there any fees per draw?

None of the lenders I interviewed charged transaction fees, but it does not hurt to ask.

Is there a minimum I must draw at closing?

Some lenders will ask that you draw out a minimum amount at closing. Of course, after the draw, the money is yours to do with what you please. This means you can immediately repay it if you are not ready to use the money, thus avoiding unnecessary interest fees. 

These questions told me all I needed to know. I created a spreadsheet and compared the lenders until I landed on one. In general, the credit unions offered more favorable terms.

My appraisal came back higher than I thought, therefore my HELOC came back higher than expected. 

Let me know if you have any questions about specific lenders or anything else. Until next time!