A family’s most valuable asset is their home. Many homeowners use a Home Equity Loans or a Home Equity Line of Credit (HELOC) to finance big ticket items like a child’s college education, home improvements and even medical bills. If you are considering a HELOC, you’ll want to take advantage of the best credit terms without subjecting yourself to any undue financial risks since inability to repay the borrowed amount plus interest could cost you your home. Here are some things to consider.
It’s important to understand the difference between a home equity loan and a Home Equity Line of Credit. With a home equity loan a lender agrees to loan a maximum amount for an agreed upon time period (a term) with the borrower’s equity in his or her home as collateral. Equity is the amount of money you would receive after selling your home and paying off the mortgage. Home equity loans provide homeowners a one-time advance with specific monthly payments and a specified time frame for repayment. Home equity loans are a convenient way to borrow money because of flexible terms and competitive rates.
A Home Equity Line of Credit differs from a home equity loan because of the way the loan works. With a HELOC, the homeowner has a maximum dollar amount they are qualified for, allowing them to advance up to the qualified amount whenever they want. Your monthly payments are determined by how much you owe at the time of billing. There are fixed rate, variable rate and interest only HELOCs.
There are several advantages to HELOCs. With a HELOC you can pay down the loan, advance again and pay the balance down again as you have the money to do so. This method lets you access your line of credit by simply writing a check, borrowing what you need when you need it. HELOCs with a fixed rate repayment option let the borrower lock the rate, time period and payment of the loan. This provides the homeowner with predictable monthly payments that remain the same for the life of the loan. Despite locking in a certain loan amount, borrowers still the HELOCs remaining amount is still available.
It’s also essential that borrowers understand that some HELOCs allow a minimum monthly payment which only covers interest costs. While such a feature allows a borrower to carry the balance over to the next month, it means you’ll have the loan longer than you may have once thought. HELOC interest rates are typically based on the prime rate which usually hovers in the single-digits unless your rate is locked. But if you haven’t locked your HELOC’s rate, then it is variable and rises when the Federal Reserve increases rates to stem inflation. Sometimes rates may climb 2 percent or more and can happen quicker than you might think. Before you sign the paperwork, be sure the total amount of your home loans don’t equal more than 80 percent of your home’s market value. Much of the country has experienced a decrease in the value of their homes. Folks who didn’t use this rule of thumb a few years ago found that the equity they had counted on wasn’t there.
Homestead’s loan officers are here to help and can answer any additional questions you have about home equity loans and Home Equity Lines of Credit.