HELOCs in California: What homeowners should know

Whether you've got a big remodel planned or you're looking to pay down high-interest debt, a home equity line of credit (HELOC) in California could give you a way to make it happen. 

A California HELOC lets homeowners borrow against the equity in their property. 

A HELOC has a draw period when you can borrow, repay, and borrow more money up to your credit limit. When the draw period ends, the repayment period starts and you can’t borrow more. Rates are often variable and based on the prime rate.

Here's a closer look at what you need to know so you can decide whether a California HELOC is right for you.

How do HELOCs work in California?

In California, a HELOC is a line of credit guaranteed by the home you borrowed against. For the majority of borrowers, that means primary residence. If your home’s value has risen since you bought it, and you’ve been making payments against your mortgage, you might have built up significant equity that you could borrow against.

You could use a HELOC to pay off high-interest credit card debt so you can pay less in interest overall. Or you could borrow against your equity to fund a home improvement project that will increase the value of your home. For the most part, you could use a HELOC to cover any large expense.

Here’s how HELOCs work. HELOCs have two phases: the draw period and the repayment period. The draw period is the initial phase, often ranging from five to 10 years, where you can borrow money. You sometimes make interest-only payments during this time. You can pay back the principal as well, but you don't have to. If you do, you'll have the option to borrow more later in the draw period.

Once the draw period ends, you enter the repayment period. You can no longer borrow any more money, and you’ll begin making regular payments of the loan principal and interest. The repayment period is usually 10 to 30 years. 

HELOC interest rates are typically variable. Some lenders, including Achieve Loans, offer fixed-rate HELOCs. A fixed-rate HELOC erases the uncertainty of a variable-rate loan because you know from the start what your interest rate will be after the draw period. You know upfront how much you'll pay in interest over the life of the loan.

What are the typical HELOC requirements in California?

HELOC requirements in California vary slightly by lender, with a few general rules.

First, you need a decent amount of equity in your home. Lenders typically look at your combined loan-to-value ratio (CLTV) to decide how much you're eligible to borrow. You calculate this by adding the amount you owe on your mortgage and the amount of the HELOC you want and then dividing this by the appraised value of your home.

Let’s say your home is worth $500,000, and your mortgage balance is $300,000. You want a HELOC for $50,000. 

Here’s the math. Add together the two loans (your mortgage and the HELOC you want), then divide the result by your home value and multiply by 100 to get CLTV. 

1. $300,000 + $50,000 = $350,000

2. $350,000 / $500,000 = .7

3. .7 x 100 = 70% 

Your CLTV ratio is 70%. 

Most lenders allow a maximum CLTV ratio of about 80%. You might be able to find lenders that will let you borrow a bit more. 

Lenders want to confirm that you'll be financially able to keep up with your payments before they approve you. So they look at the following:

• Credit score. Most lenders require you to have at least a 600 credit score, but some may require a higher minimum, especially if you're borrowing a large sum or have a long repayment term.

• Debt-to-income ratio (DTI). Your DTI ratio looks at how much of your gross monthly income goes toward debt payments. Generally, lenders like this to be 43% or lower.

• Consistent income. Lenders will want proof that you have a consistent source of income you can use to make your HELOC payments.

Note that many lenders only offer HELOCs on owner-occupied property. A handful of lenders do offer HELOCs on investment properties but they’re less common.

California HELOC rates—what affects them?

HELOC rates in California are tied to the lender's benchmark rate, just like in other states. Your actual rate depends on several factors, including your:

• Credit profile

• Income

• Debt-to-income ratio

• Loan-to-value ratio

• Combined loan-to-value ratio

High property values may affect borrowing limits but don't automatically change the base rate.

The lender's benchmark rate depends on company policy and market conditions at the time. If interest rates are high on other types of loans, you'll likely notice California HELOC rates begin to creep up as well. Similarly, if rates on other loans fall, HELOCs often follow suit.

Lenders tend to offer lower HELOC rates to borrowers with high credit scores. That’s because lenders perceive them as less likely to fall behind on their payments, so the lender’s risk is lower.Check with the lenders you're interested in to learn what rate they're willing to offer you.

Pros and cons of a HELOC in California

Here's a look at some of the pros and cons of HELOCs in California:

Pros

• Access home equity for a variety of purposes

• Flexible borrowing during the draw period

• May offer lower rates than unsecured credit

Cons

• Variable interest rates could increase

• Market value changes may impact borrowing capacity

• Your home guarantees the loan. If for some reason you can’t repay the loan, you could lose your home.

How to choose a HELOC lender in California

When searching for the best HELOC lenders in California, there are a few steps you should follow. 

First, compare rates from three to five companies. They may have online tools that give you a quick estimate of what you can expect to pay. Otherwise, you can contact the lender to request more information. Ask whether the rate is fixed or variable. If it's variable, also ask whether there are caps on how high your interest rate can go.

Ask about what fees you could pay as well. Usually, you'll face an origination fee when you take out the loan. You might also pay an annual fee for each year the HELOC stays open as well as a cancellation fee for terminating the HELOC early.

Review the draw period and repayment terms to understand when you're allowed to take money out and what kind of payments you'll be expected to make during the draw period. Review the term so that you understand when it starts and ends. 

Last, confirm how much you'll be allowed to borrow. If you can't find someone willing to lend you as much as you want, you may need to wait until you've built a little more equity in your home before you apply for a HELOC.

Is a HELOC the right choice for you?

A HELOC could be the right choice for you if you have a stable income and are looking for a way to pay off high-interest debt or give your home a much-needed upgrade. If you're still not sure, dig deeper into how a HELOC works before you make that call.

Compare a HELOC vs. a cash-out refinance or a home equity loan vs. a personal loan to find out whether one of these options makes more sense for you. If you're trying to pay down debt, any of these options could be used as a debt consolidation loan.

A HELOC gives California homeowners a flexible way to put their equity to work. The more you know about your options and terms upfront, the more confident you'll feel when it's time to borrow.