Fannie Mae HELOC vs Home Equity Loan Explained

If you're considering tapping into your home's equity, you have two popular options: a Home Equity Line of Credit (HELOC) and a Home Equity Loan. A Fannie Mae HELOC allows you to borrow up to 80% of your home's value.

A Fannie Mae Home Equity Loan, on the other hand, provides a lump sum of cash that you can use for any purpose. You can borrow up to 85% of your home's value with a Home Equity Loan.

A HELOC is a type of loan that lets you borrow money based on the equity in your home. You can access the funds during a specific draw period.

You'll have a pre-approved amount of revolving credit, which means you can borrow and repay the funds as needed. This is a key difference from a traditional loan, where you receive a lump sum upfront.

There are two main periods of a HELOC: the draw period and the repayment period. During the draw period, you can borrow and repay the funds as needed. During the repayment period, you'll pay off the balance over a fixed term of years.

A Fannie Mae HELOC can be a great way to tap into your home's equity, but there are some things to consider before taking the plunge. You can borrow up to 80% of your home's value, minus any outstanding mortgage balance.

One potential benefit of a Fannie Mae HELOC is that it often comes with a lower interest rate than other types of loans, such as credit cards or personal loans.

A HELOC (Home Equity Line of Credit) is essentially a pre-approved amount of revolving credit based on your home's equity that you can access during a specific draw period.

You'll pay off the balance during a repayment period, which is a fixed term of years, but be aware that your HELOC payments may change from month to month due to various factors.

A home equity loan, on the other hand, is a lump sum of money borrowed against your home's equity, with a fixed interest rate and a set repayment period.

Your HELOC payments may change, but a home equity loan's payments will remain the same throughout the repayment period.

If you're considering a Home Equity Line of Credit (HELOC), it's essential to know the potential downsides. You risk losing your home to foreclosure if you're unable to repay the loan.

A HELOC can also shrink your home equity, which is the value of your home minus any outstanding mortgage balance. This can be a significant concern, especially if you're planning to sell your home in the future.

There's a cost of interest on the money you borrow, which can add up over time. For example, if you borrow $10,000 at an interest rate of 6%, you'll pay around $600 in interest over the first year.

If you have a variable interest rate, your payment can rise if rates increase. This can make it difficult to budget and plan for your loan payments.

You may also be charged annual fees regardless of if you borrow money. This can range from $50 to $1,000 per year, depending on the lender and the terms of your loan.

The HCLTV ratio is determined by dividing the sum of the original loan amount of the first mortgage, the full amount of any HELOCs, and the unpaid principal balance of all closed-end subordinate financing by the lesser of the sales price or appraised value of the property.

To calculate the HCLTV ratio, lenders must consider the maximum credit line for all HELOCs and the unpaid principal balance for all closed-end subordinate financing. If any subordinate financing is not shown on a credit report, the lender must obtain documentation from the borrower or creditor.

Here's a breakdown of the items that lenders must consider when calculating the HCLTV ratio:

Keep in mind that if the borrower discloses new or increased subordinate financing after the underwriting decision has been made, the lender must re-underwrite the mortgage loan.

During the repayment period, you'll no longer be able to borrow additional money from the HELOC account.

You'll be required to pay off the outstanding HELOC balance in regular periodic payments. This period is fixed, just like the draw period.

The length of the repayment period depends on the terms of your loan, but it's typically a fixed number of years.

Your lender may not allow you to borrow funds if your home's value decreases significantly due to market changes, which can impact your ability to pay off the balance.

You'll be charged interest on the outstanding balance, which can fluctuate from month to month due to variable interest rates.

The HCLTV ratio is a crucial calculation for lenders to determine the risk of a mortgage loan. It's determined by dividing the sum of the original loan amount of the first mortgage, the full amount of any HELOCs, and the unpaid principal balance of all closed-end subordinate financing by the lesser of the sales price or appraised value of the property.

To accurately calculate the HCLTV ratio, lenders must determine the maximum credit line for all HELOCs and the unpaid principal balance for all closed-end subordinate financing. If any subordinate financing is not shown on a credit report, the lender must obtain documentation from the borrower or creditor.

The HCLTV ratio is used to determine the borrower's eligibility and underwriting purposes. If the borrower discloses or the lender discovers new or increased subordinate financing after the underwriting decision has been made, the lender must re-underwrite the mortgage loan.

Here's a breakdown of the fields required for the HCLTV ratio calculation:

The lender must also deliver Sort ID 92 - Home Equity Combined LTV Ratio Percent (HCLTV) if any subordinate financing associated with a loan is a HELOC.

A home equity line of credit (HELOC) is a type of mortgage that allows you to borrow money using the equity in your home as collateral. If your mortgage has a HELOC, the payment on it must be considered as part of your recurring monthly debt obligations. This means you'll need to factor it into your overall budget.

The payment on your HELOC can be either principal and interest or interest only. If it's the latter, you'll only be paying the interest on the borrowed amount, not the principal. This can be a relief, but it's essential to remember that you'll still be accumulating interest over time.

If your HELOC doesn't require a payment, you won't have a recurring monthly debt obligation, and your lender won't need to develop an equivalent payment amount.

Garnishments can have a significant impact on your HELOC repayment plan. All garnishments with more than ten months remaining must be included in the borrower's recurring monthly debt obligations for qualifying purposes.

It's essential to factor in garnishments that are still far from being paid off. This means considering garnishments that are more than ten months away from being settled.

To accurately plan your HELOC payments, you'll need to account for these long-term garnishments.

Revolving charge accounts and unsecured lines of credit are open-ended and should be treated as long-term debts and must be considered part of the borrower's recurring monthly debt obligations.

These tradelines include credit cards, department store charge cards, and personal lines of credit.

Equity lines of credit secured by real estate should be included in the housing expense.

If the credit report does not show a required minimum payment amount and there is no supplemental documentation to support a payment of less than 5%, the lender must use 5% of the outstanding balance as the borrower's recurring monthly debt obligation.

For DU loan casefiles, if a revolving debt is provided on the loan application without a monthly payment amount, DU will use the greater of $10 or 5% of the outstanding balance as the monthly payment when calculating the total debt-to-income ratio.

Getting a current home appraisal before applying for a HELOC is a smart move, especially if you think your home's value has increased. This can give you a more accurate picture of your home's worth and help you make informed decisions about using your home equity.

Renovating or remodeling your home to increase its value is a common use for a HELOC, as is paying off high-interest rate debt like credit card balances. These can be great ways to use your home equity, but make sure you're not using it for nonessential purchases.

Before committing to a HELOC, ask yourself if it's worth eating into your home equity to cover the cost. Consider whether the benefits outweigh the risks of taking on more debt.

Different lenders have different HELOC qualification requirements, but they all require you to have available equity in your home. This means your home must be worth more than the amount still owed on your mortgage plus any other liens on the property.

Here are some common factors lenders review when determining if a HELOC is a good fit for you:

Check with different lenders to make sure you're getting the best terms and lowest interest rate available. This can save you money in the long run and help you manage your debt more effectively.

Our experts receive thousands of questions from subscribers, and one of the most common is about HELOCs and refinancing.

If you've purchased a primary residence with a 1st and 2nd lien, and the HELOC funds are being used for home improvement projects, it's essential to understand the refinance rules.

Anytime you combine the original first mortgage and the 2nd mortgage into one new loan, it would be considered a cashout, even if the HELOC is being used to enhance and improve the property.

The Fannie and Freddie rule requires the underlying loan to be seasoned one full year, so you can't do a cashout refinance to pay off the current first and the HELOC until July 2025.

You could, however, do a rate/term on the first and resubordinate the 2nd to avoid the cashout timing.