Fund your future with a 30-year HELOC: Benefits, risks and how to apply

Your home could hold the key to transforming your visions into reality. Imagine refreshing your living space or clearing higher-interest debts with a strategic financial approach. Or both. A home equity line of credit could be your bridge from where you are to where you want to be. Your home isn't just a place to exist. It's a powerful financial asset that could be a stepping stone to a better future. A 30-year HELOC is one path you might consider. Let's look at how it works. 

The 30-year HELOC in a nutshell

Here are the main highlights of a 30-year home equity line of credit. 

• Get access to a line of credit to use as needed

• Only pay interest on the amount you borrow

• Use your credit line to pay for home improvement, large expenses, debt consolidation, or financial emergencies

• Repay your HELOC at a competitive interest rate 

• Enjoy a longer payoff term than other HELOC options

Some of these features are shared by 15- and 20-year HELOCs. The difference is that the 30-year HELOC gives you more time to repay what you owe. 

How the draw period and repayment phase work in a 30-year HELOC

How does a HELOC work? When you get a HELOC, you have a draw period and a repayment period. Each one works differently. 

• During the draw period, you can access your credit line and use it any way you like. You can borrow, repay, and borrow more, up to your credit limit, as often as you want to. You’ll make monthly payments during this time, and the payment amount could fluctuate depending on how much you owe.

• Once you enter the repayment phase, you pay back what you owe and you can’t borrow more. Your monthly payments will be for an amount calculated to repay the loan in full by the end of the repayment period.

At Achieve, the draw period for a 30-year HELOC is five years. 

30-year HELOC interest rates

Interest rates influence how much you ultimately pay to borrow money using a 30-year HELOC. 

The first important question is whether you have a fixed or variable rate. 

A variable-rate HELOC has an interest rate that's tied to a benchmark rate. For example, your rate might be based on the prime rate, which banks use to set the interest rates they charge consumers.  

Economic conditions can cause the prime rate to go up or down. If the prime rate moves up, then the variable rate on your HELOC can go up too. That means you pay more in interest. 

On the other hand, if the prime rate drops, then your HELOC variable rate could go down. That could save you money in interest, especially if rates remain low for the long term. 

Some HELOCs have a variable interest rate during the draw period and convert to a fixed rate for repayment. Like credit card interest rates, variable interest rates on HELOCs are unpredictable and can make your payment amount fluctuate.

What is a fixed-rate HELOC? 

A fixed-rate HELOC isn't affected by interest rate fluctuations. The rate you lock in when your loan is approved is the same rate you'll pay until the end of the loan term. 

Fixed rates offer predictability. You'll always know what your monthly payment will be, and you can calculate the total amount of interest you'll pay. A fixed rate stays the same over the life of the loan and protects you from the uncertainty of changing interest rates.

Achieve HELOCs have a fixed interest rate from day one. 

Eligibility criteria for a 30-year HELOC

HELOCs are mortgages. Lenders decide who's eligible for a 30-year HELOC based on a range of factors. 

You'll need to meet the lender’s minimum credit score requirements.

The minimum credit score needed for a HELOC varies from lender to lender. It often falls somewhere between 640 and 700. A higher credit score could put you in a better position to be approved for the loan you want. 

You’ll need to meet the lender’s debt-to-income ratio requirements.

Your debt-to-income ratio is the percentage of your before-tax income that you spend on debt and housing each month. Ideally, this figure should be under 43%, but you might still qualify with a DTI of up to 50%.

You’ll need to have sufficient home equity to borrow against.

Lenders limit how much they’ll loan you against your home. This limit is called the combined loan-to-value ratio, or CLTV.  It works by adding your mortgage balance and the HELOC you want, and comparing the total to your home’s current market value. 

For a 30-year HELOC, Achieve’s CLTV limit is 85%. That means your mortgage balance and your HELOC can’t equal more than 85% of your home’s value. Here’s an example:

Your home is worth $500,000, and the lender’s CLTV limit is 85%. You still owe $150,000 on your mortgage, which means you have $350,000 in home equity. You could apply for a $275,000 HELOC and still be under the lender’s 85% CLTV limit.

Here's a look at how the key steps in the HELOC process work. 

• Choose a lender to work with.

• Apply for a HELOC and submit the required documentation. 

• The lender will verify the value of your home (for a HELOC, this is often done by software instead of an in-person appraisal) 

• Follow up on lender requests for additional documentation. 

• If approved, review the loan paperwork and sign. 

• Get access to your new line of credit. 

The kind of documents you need to apply for a HELOC are similar to what you need for a mortgage. Your lender may ask for paystubs, bank account statements, and tax forms. You may need to offer a profit-and-loss statement or cash flow statement if you're self-employed. 

Shopping for a 30-year HELOC

If you plan to get a 30-year HELOC, finding the right loan matters. The best HELOC for you is one that allows you to borrow the amount you need, with the lowest interest rates and the fewest fees. 

This is where it's a good idea to shop around for lenders, since HELOCs aren't all alike. These tips could help you find the right fit. 

• Check your credit to get an idea of what kind of rates you might qualify for. 

• Look for fixed-rate HELOC options with competitive rates.

• Review the fees, draw periods, and repayment terms. 

• Consider the ways you'll have to access your line of credit (i.e., debit card, checks, in-person withdrawals, etc.).

• Check the CLTV requirements and appraisal process. 

• Review the credit score and debt-to-income requirements. 

You can also compare funding speeds. Some lenders may offer quicker access to your line of credit than others once approved. Know the steps to take to minimize the time it takes to get a HELOC. 

Pros and cons of a 30-year fixed-rate HELOC vs other borrowing options

A 30-year fixed-rate HELOC could put cash in your hands and enable you to reach your goals. That said, here are some of the advantages and disadvantages of HELOCs. 

Pros:

• HELOCs give you the flexibility to borrow exactly what you need, and only pay interest on what you borrow. 

• You could use a HELOC to pay for college, fund home renovations, consolidate debt—you're in control of what you do with the money. 

• HELOCs may offer access to higher loan limits than personal loans or credit cards, while charging lower interest rates. 

A fixed-rate HELOC doesn't have any surprises when it comes to your monthly payments or what you'll pay in interest. 

Cons:

• Some lenders may have a minimum initial draw, which means you have to take out a certain amount of money from your HELOC even if you don't plan on using it right away.

• A lower credit score could make it difficult to secure the best rates on a 30-year HELOC. 

• The longer you take to pay off a debt, the more interest you’ll pay overall. A 30-year loan might not be the best plan for smaller debts that you could pay off sooner.

How to manage your 30-year HELOC

You have to repay a 30-year HELOC like any other debt. These tips could help you manage your home equity line of credit without hiccups. 

• Keep track. As you draw money from your line of credit, it's a good idea to make a note of the amount and what you use it for. That way, there are no surprises about what you'll have to repay.

• Pay in the draw period. Your lender might expect you to make payments toward only the interest in the draw period. If you do this, the amount you owe won’t go down. At Achieve, you’ll make a principal and interest payment on the amount you borrow during the draw and repayment periods.  

• Consider a rate conversion. If you get a HELOC with a variable rate but have the option to convert to a fixed-rate, consider whether it's worth it to do so. A fixed-rate HELOC might be better if you want a stable payment each month. 

• Enroll in automatic payments. You could avoid late payments if you pay your HELOC automatically each month. If you can't do an auto draft, set up a due date reminder so you can plan your payment well in advance. 

What's next

• Use a HELOC calculator to estimate how much of your home equity you might be able to borrow. 

• Check your credit to get an idea of what rates you might pay for a HELOC. 

• Use an online DTI calculator. Knowing your DTI could help you understand how much of a new loan payment you could comfortably afford.

• Look for a lender that offers HELOC rate quotes without any impact to your credit score.