How does a home equity line of credit (HELOC) work? A HELOC can be a smart and flexible way to tap into your home’s value. Whether you’re planning a home renovation, consolidating debt, or covering unexpected expenses, a HELOC gives you access to funds when you need them—often at lower interest rates than credit cards or personal loans.
In this guide, we’ll explore how HELOCs work, their benefits, and what you need to qualify in Washington State. Plus, we’ll cover key factors to consider when choosing the right HELOC for your financial goals.
What Is a HELOC?
Understanding Home Equity Lines of Credit (HELOC)
A HELOC is a revolving line of credit secured by your home’s equity. Unlike a traditional home equity loan, which provides a lump sum, a HELOC lets you borrow and repay as needed—similar to a credit card but with lower interest rates.
How Does a Home Equity Line of Credit Work?
A HELOC typically has two phases:
Draw Period (Usually 10 Years): You can borrow as needed and may only be required to make interest payments during this time.
Repayment Period (Usually 10–20 Years): Once the draw period ends, you must repay both principal and interest in fixed monthly installments.
Benefits of a HELOC
Flexible Access to Funds
A HELOC provides on-demand borrowing, making it ideal for expenses that arise over time, such as home renovations, college tuition, or unexpected costs. You only pay interest on what you borrow, offering financial flexibility.
Lower Interest Rates Compared to Other Loans
HELOCs generally have lower interest rates than credit cards and personal loans because they are secured by your home. This makes them a cost-effective borrowing option compared to high-interest unsecured loans.
Potential Tax Advantages
Under IRS guidelines, interest paid on a HELOC may be tax-deductible if the funds are used for home improvements. Always consult a tax professional to determine your eligibility.
How to Qualify for a HELOC in Washington
Credit Score and Income Requirements
Lenders generally prefer borrowers with strong credit history to qualify for the best HELOC rates. While requirements vary, most lenders look for a credit score of 680 or higher, though some may approve applicants with lower scores depending on their income, home equity, and debt levels. A higher credit score typically results in better interest rates and terms.
Lenders also review income stability to assess repayment ability, requiring proof of employment, self-employment earnings, or other consistent sources of income.
How Much Equity Do You Need?
Your borrowing limit depends on the amount of equity in your home. Most lenders allow you to borrow up to 75–85% of your home’s appraised value, minus any existing mortgage balance. This means you generally need at least 15–25% equity in your home to qualify. (In other words, you would need to have already paid off at least 15% to 25% of your home’s total appraised value.)
For example, if your home is worth $400,000 and you still owe $200,000 on your mortgage, a lender may allow you to borrow up to $100,000 through a HELOC, keeping your total debt at 75% of your home’s appraised value.
Debt-to-Income (DTI) Ratio Considerations
Lenders assess your debt-to-income (DTI) ratio to determine your ability to repay a HELOC. This ratio compares your monthly debt payments to your gross monthly income. A lower DTI ratio improves your chances of approval and may help you secure better interest rates.
How to Apply for a HELOC
Steps to Get a HELOC with Salal Credit Union
The application process typically follows these steps:
- Check Your Eligibility: Review your credit score, home equity, and financial situation.
- Compare Lenders: Research HELOC options to find the best rates, terms, and benefits.
- Submit an Application: Apply online or in person at any Salal branch.
- Home Appraisal (if required): Some lenders require a home appraisal to confirm your property’s value.
- Approval & Funding: Once approved and finalized, you can withdraw funds as needed.
Documents You’ll Need
- Proof of income (pay stubs, tax returns, or bank statements).
- Homeownership verification (mortgage statement, property deed).
- Credit report and financial history.
How Long Does Approval Take?
The time it takes from application to approval to when funds are available depends on a number of variables, including if an appraisal of your home is required and how quickly all documents can be processed. It’s good to note that homeowners should wait until their line of credit is officially available before starting any projects or making any big purchases.
Smart Ways to Use a HELOC
Home Renovations and Improvements
Using a HELOC for home improvements can increase your property’s value while maintaining financial flexibility. Popular projects include kitchen remodels, bathroom renovations, and energy-efficient upgrades.
Debt Consolidation
A HELOC can help consolidate high-interest debt, such as credit card balances or personal loans, into a lower-interest repayment plan, making it easier to manage and reduce monthly payments.
Emergency Expenses
Unexpected expenses, like medical bills or urgent home repairs, can put financial strain on your budget. A HELOC provides a safety net, giving you access to funds when you need them most.
Investment Opportunities
Some homeowners use a HELOC to invest in real estate, start a business, or fund education, leveraging their home equity to generate future financial returns. While this can be a strategic move, it’s important to weigh the risks and consult with a financial advisor.
Why Choose Salal Credit Union for Your HELOC?
Competitive Rates and Member Benefits
When you choose a HELOC with Salal, you’re not just getting a competitive rate—you’re gaining access to a financial partner that’s dedicated to your success. That means low rates, fewer fees, and better loan terms compared to many traditional profit-driven banks.
Learn more about Salal’s unique Custom Fit Home Equity that combines the best parts of two traditional home equity solutions to give you more options.
