How to unlock your home's potential with a $300,000 fixed-rate HELOC

If you have big dreams and are a homeowner, you may be in luck. Whether you want to cover medical expenses, fund your children’s college education, or make major renovations to your home, a $300,000 home equity line of credit (HELOC) could help you fulfill your dreams. Before tapping the money in your home, you'll want to learn more about a fixed-rate HELOC, how it works, and whether it's the right financial solution for you. 

The goal is to be so well-armed with information that you can make a decision that benefits you today and long into the future. 

What is a $300,000 HELOC?

A HELOC is a line of credit secured by your home. In other words, your home acts as collateral to guarantee the loan. Using your home as collateral comes with both risks and benefits. The primary risk is losing your home to repossession if you don't repay the loan. That's why it's so important to be sure you can afford the monthly payments before considering a home equity loan. 

One of the biggest perks of home equity loans is that they tend to carry lower interest rates than other types of loans. That's because the lender knows your home secures the loan, and the lender has options if you fall behind on payments. 

Line of Credit

A line of credit is a type of revolving credit account. Similar to a revolving door that allows you to go in and out of a building, revolving credit allows you to borrow, pay off, and borrow more (up to your credit limit). Credit cards work this way, and so do HELOCs.

A home equity line of credit is different from a home equity loan because once you’re approved for a HELOC, you could borrow, repay, and borrow more, up to your credit limit, for several years. With a home equity loan, you would receive all of the loan funds at once when your loan closes, and you can’t borrow more without applying for a new loan.

However, with a HELOC, you can borrow money as needed during the draw period. That means having an emergency fund at your fingertips for the surprises life throws your way. 

Equity

How much you're eligible to borrow on a home equity loan is directly tied to how much equity you have in your home.

Figuring out home equity is easy. Just subtract the amount you still owe on your home from its appraised value. Here's a simple illustration of how equity is calculated:

• John and Karen’s home is worth $750,000

• The couple owes $250,000 on the mortgage.

• John and Karen have $500,000 in equity. 

The amount of equity a homeowner has doesn’t mean they can borrow that total amount. Although John and Karen have $500,000 in equity, that doesn't mean they can borrow the full $500,000. Lenders typically allow homeowners to borrow up to a maximum percentage of the value of their home, including the mortgage and the new home equity loan or HELOC the borrower wants. This limit is called the combined loan-to-value ratio, or CLTV. 

For example, if John and Karen's lender allowed a combined loan-to-value ratio of up to 80%, the couple could borrow up to $400,000 ($500,000 x 0.80 = $400,000). 

Variable vs. fixed rates

Some HELOCS have a variable rate, which means the rate could change over the loan's lifetime. A rate change also changes the monthly payment. This situation may not be ideal for a borrower who's carefully watching their budget and needs a monthly payment amount they can count on to remain the same.

Achieve offers a fixed-rate HELOC. The rate remains the same throughout the entirety of the loan. 

Draw period vs. repayment period

The draw period for a home equity line of credit through Achieve is five years. During this period, you could borrow up to your credit limit, repay it, and borrow it again. 

It's also during this period that you make regular monthly payments based on the amount you owe. With a HELOC through Achieve, you’ll make a principal and interest payment based on the amount you’ve borrowed. Your payment amount could fluctuate as you make additional draws or pay down your balance, or both. You’ll only be charged interest on the amount you borrow, even if your credit limit is higher.

Other lenders may allow you to make an interest-only payment during your draw period. If you only pay interest, the amount you owe won’t go down. 

Once the draw period is up, you enter the repayment period. At this point, you can’t borrow more. Your monthly payment will be set at an amount calculated to fully pay off the loan by the end of the repayment period. 

Monthly payment on a $300,000 HELOC

Your monthly payment depends primarily on three factors:

1. Amount you owe

2. Annual percentage rate (APR)

3. Loan term

To give you an idea of your monthly payment, we'll assume that you owe $300,000 when you begin your repayment term.  

This table is for informational purposes only. Interest rate and payments are for illustrative purposes only. Individual results vary. This example uses the Actual 360 interest calculation method. 

Best uses for a $300,000 fixed-rate HELOC

What you spend the home equity loan on is up to you. However, here are some common uses:

• Major home upgrades or additions

• Cover a large expense, such as medical bills

• Pay for family planning or fertility treatments such as IVF

• Pay for higher education

• Consolidate high-interest debt

Let's imagine that John and Karen decide to remodel their home from top to bottom. They take out a 30-year HELOC with an 11% interest rate and are approved for a $300,000 loan. The couple takes full advantage of the five-year draw period, slowly turning their home into a showplace. In the first year, they add their dream kitchen, carefully choosing cabinets, flooring, and appliances that work with their lifestyle. Once they make their first withdrawal, they make payments on the amount borrowed.

By the time they're done, the couple has borrowed the entire $300,000 loan for which they were approved. As soon as the draw period expires, John and Karen begin making a total monthly payment of $2,919 for 30 years. In the meantime, they have the home they've always dreamed of. 

Steps to apply for a $300,000 fixed-rate HELOC

Applying for a HELOC requires you to take four basic steps. 

1. Check your credit score. Ask the lender how close you are to a lower interest rate. It might be worth your time to work on improving your score before you apply. 

2. Review your budget and determine the monthly payment you can afford while keeping your debt-to-income ratio under 50%. If your credit score is good but not great, you'll want to keep your DTI at 43% or less. 

3. Apply online or over the phone. Have all the necessary paperwork and information ready. In addition to income and employment information, you'll need a mortgage statement and a rough estimate of your home's worth. 

4. Once your application is approved, the loan will undergo the underwriting and closing process. During closing, you sign the paperwork and finalize the loan. 

What to expect when a $300,000 HELOC is approved

Once your home equity loan is approved, here's what you can expect:

• Draw period: With an Achieve HELOC, your draw period is five years. 

• Disbursement of funds: Funds may be dispersed in as little as 10 days. Depending on the lender’s options and your preferences, you might receive the money in your checking account, or you may be given a debit card or checks attached to your HELOC account.

• Repayment terms and schedules: You can choose a 10, 15, 20 or 30-year term. Your payments start after funds are disbursed or you take your first draw. Once the repayment term starts, if you make all your scheduled payments, you’ll pay off the loan in equal monthly installments that last until the end of the repayment period.

• Early repayment options: You can pay off an Achieve HELOC anytime, with no prepayment penalty. 

What's next

The decision to borrow against the equity in your home is a big one. Before moving forward, consider doing these things first:

• Consider how you’d like the money to be used.

• Go over your credit reports with a fine-tooth comb to ensure there are no mistakes. 

• Work your monthly budget to figure out what monthly payment you can comfortably afford.

• Check with lenders who do a soft pull on your credit. 

• Ask questions! If there's anything you don’t understand about a loan, ask for clarification. 

If you're considering a $300,000 HELOC, you undoubtedly have big dreams. As you consider your funding options, remember that the money to finance those dreams may be right under your roof.