Explaining Home Equity Line of Credit (HELOC) to Borrowers

A growing number of borrowers may be interested in a home equity line of credit. It’s your time to shine!

Have you noticed an uptick in the number of owners curious about a home equity line of credit? Or maybe they haven’t necessarily put a name to it, but still express an interest in tapping into the equity in their home to purchase another property or initiate a large-scale renovation? Turns out, you’re not alone.

Just last year, online searches for the term “HELOC” jumped a staggering 305%. They then reached an all-time high in July 2023. That’s a lot of curious borrowers who could really use a mortgage professional just like yourself!

That may be because the reality is that average Americans face low levels of financial literacy. They’ll need a trusted mortgage professional to guide, advise, and educate them on all their home financing options, HELOCs included.

So, if you have a client or ten that might benefit from a HELOC, here’s how to walk them through the basics, empowering them with education all along the way.

What is a Home Equity Line of Credit (HELOC)?

While you’re working with mortgage products all day every day, the average American is not. So, most borrowers may come to you with little to no knowledge of HELOCs. You’ll want to start the conversation with a thorough explanation.

Here’s a sample script you can use:

“A home equity line of credit is basically what the name implies—an open ended line of credit that allows you to borrow against the asset that is your home for a limited amount of time. You can pull out money during a pre-determined draw period and up to a stated dollar amount. This is opposed to receiving one lump sum as a payout.”

HELOC Clarifications

Of course, as you know, that’s not quite all there is to it.

Clients should start by determining what kind of project, purchase or home improvement they’d like to tackle. Explain that, as HELOCs provide some flexibility, they may tend to be best for intensive or longer-term home improvements. This might include a renovation of multiple rooms or any other project where the scope or cost could vary. If their project doesn’t feel like a fit, don’t hesitate to let them know.

Then, clarify that, if the clients were to obtain a home equity line of credit, they may be able to essentially borrow what they needed when they needed it. But they shouldn’t expect to go wild!

Remind them that there is a pre-determined limit that they may borrow up to and a pre-determined draw period during which they can do so. Pause to double-check for understanding here, just in case.

It’s also important to discuss interest rates. Explain that HELOCs often have variable interest rates which may be higher than prevailing more traditional mortgage loan rates, so their repayment amount may change depending on the rate at that time. There’s a good chance your clients won’t have the firmest grasp on the effects of variable interest, so you might want to run some numbers together.

Finally, make sure your borrowers understand that their property will be used as collateral. They’ll need to be crystal clear on the terms and conditions related to their specific HELOC program. After all, that’s a hard price to pay upon (knock on wood) default!

Potential Pros and Cons of a Home Equity Line of Credit (HELOC)

To help ensure your client might benefit from a HELOC loan program, walk through some of the potential pros and cons together.

 Pros of a HELOC

• Relatively low APRs, especially when compared to credit cards or even some personal loans.
• Interest paid may qualify as tax-deductible. They may want to consult a tax professional of their choice for more information.
• They may be able to borrow only what they need, leaving room for potential remaining equity.
• Repayment options may be flexible.
• Taking out a HELOC could potentially help boost the borrower’s credit score.

Cons of a HELOC

• The home is put up as collateral, which can be risky for certain borrowers.
• Interest rates are typically variable, meaning payment amounts can change regularly.
• Interest rates may be higher than a cash out refinance.
• Borrowers may be allowed to make interest-only payments during the draw period, which can lead to overspending or lack of planning.
• Home equity is reduced.

How to Apply For a HELOC

If a HELOC still sounds like a solid solution for the borrower’s goals, it’s time to clarify the process for applying for a HELOC. Review common program requirements and then discuss their options for mortgage professionals to work with. If they’re already talking to you, that’s a huge step in the right direction!

Final Thoughts: Explaining the Home Equity Line of Credit (HELOC)

To the average consumer, the concept of a HELOC may seem overwhelming at first. That’s why the mortgage professionals who share their time and attention in educating clients are sure to stand out.

Personalizing your approach, from understanding their unique situation to walking through the applicable potential pros and cons, could do more than just score you a customer, though. It could help your clients lock in a line of credit they love.

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