If you have owned a home for a few or a lot of years, you probably have a considerable amount of equity in your property. Equity is the difference between the value of your home and the amount that you owe your lender. One of the popular things that many homeowners like to do is to tap that equity with a home equity line of credit, or HELOC, so that you can use your equity for what you like.
Currently, HELOC rates remain competitive with fixed 1st and 2nd mortgage products. Many lending companies are advertising no cost HELOC loans, but let’s not get ahead of ourselves.
A HELOC loan is similar to a credit card; it has a line of credit up to a certain amount. The difference is that the equity line of credit is backed by the property. If you do not pay the loan, the bank can take your home back. As long as you keep paying however, you can eventually pay down the HELOC rates and use the credit again in the future. Home equity lines have many benefits that make them worth considering for some situations. Let’s take a look at some of the things you definitely won’t hate about a HELOC:
1. You Can Consolidate Debt
One of the most popular things to do with a home equity line of credit is to pay down credit card debt. If you have $30,000 of credit card debt at 18% interest, you are paying $5400 of interest per year. So, if you make minimum payments, you will take many years to pay off that debt.
If you take out a $30,000 HELOC on your home at 4%, you are paying just $1200 per year in interest. This is a huge interest savings. You can use the $30,000 from the HELOC loan to pay off the credit card, and your payments will be much less. Remember of course that the loan is secured by the home, so if you do not pay the loan, you will lose your home.
2. Interest Is Tax Deductible
When you are paying that high interest on your credit card, the big monthly payment is not the only problem. You also are not able to tax deduct the interest that you are paying. With a HELOC loan, you should be able to tax deduct most or all of the interest that you are paying each year at tax time. This will help you to save a good amount on your taxes. You definitely won’t hate that, right?
3. Improved Credit
If you take out a home equity line of credit and you make payments on it regularly, you should see your credit score go up over time. It helps if you do not max out the credit limit. Credit bureaus like to see a nice mix of credit on your credit report, so if you have regular payments on your mortgage, HELOC, car payment and maybe a credit card, this should help to drive up your score. This will allow you to qualify for the very best interest rates for other credit accounts.
When you get a HELOC, you will get a line of credit up to a certain amount. You do not need to take it all out at once; you don’t need to take it all out anyway. You will be able to take money out as you need it, just like a credit card, except the HELOC loan is backed by your home.
A HELOC is nice because you can just take out money as you need it, so you only are paying interest on the money that you are using. This type of loan can be appropriate for a home renovation for example; you can take the money out as the renovation continues.
5. Low Interest Rate
Because the HELOC is backed by your home, you will enjoy a much lower interest rate than you ever could get on a credit card. This makes your monthly payment much more affordable. Even better, some lenders, may offer a super low introductory rate on your HELOC for the first six months or year. Don’t forget to find out if you are eligible for a no cost HELOC loan. You also need to check with trusted lenders for today’s HELOC rates.
HELOCs are not for everyone and every situation. Below are some things to think about before you get your home equity line of credit:
Most consumers get an adjustable rate HELOC because the introductory rate for the draw period is lower. But if we enter a period where interest rates rise, you could end up with your rate going higher than you thought. Also, after the draw period ends on the HELOC loan, usually after five or ten years, your interest rate will go up. You are only paying interest during the draw period; after that, you are paying principle and interest.
Unlike a credit card, you do have to pay closing costs on your new loan. You should expect you will have to pay 1-2% of the loan amount at the very least. It still may be worth doing the HELOC loan, if you have a good reason to borrow the money, but remember that you will have that upfront cost to deal with. We continue to hear about no cost HELOC loans, but clearly not every borrower is eligible for the no closing cost programs.
Debt Consolidation Risk
We mentioned debt consolidation as a benefit earlier, and it can be. You can greatly reduce the interest rate that you are paying on your debt by paying off your credit cards with a home equity line of credit. However, you need to have some self discipline if you choose this route. If you use the HELOC as a chance to run up another $30,000 of credit debt, you really are shooting yourself in the foot. Now you have $30,000 of credit card debt again, AND a $30,000 HELOC that is backed by your home.
This is how many people can and do get into financial trouble. So use caution when you are using a HELOC loan for debt consolidation. Sometimes homeowners will be better off choosing a home equity loan, because they carry a fixed interest rate with set terms. (ie. 180 payments on a 15 year loan or 240 payments on a 20-year loan) We like HELOCs because they are a low interest way to tap your equity for important things, such as a college education or a home improvement. Just be sure that you are taking the money out of your home for a good reason. You will be paying on that loan for years, so be certain the use of the money is a good one!
10 Tips for Shopping Home Equity Line of Credit Rates
Have equity in your home that you want to tap? Then you may want to look into getting a home equity line of credit or HELOC.
A HELOC is a line of credit that uses your home’s equity as the credit line. It is secured by your property, so if you don’t pay, you can lose your home.
One of the most important parts of getting a HELOC is to get the lowest interest rate. You should know before you start shopping that HELOC rates are adjustable or variable interest rates that can go up and down in relation to various indexes, such as the prime rate. You also need to think about what the up-front costs are, such as closing costs and fees.
If you want a HELOC and want to ensure you get a low rate, keep these tips in mind:
#1 Low HELOC Rates Are Temporary
Many lenders try to get your business with a very low introductory rate. That is all well and good. Just know that you should understand that the low rate is temporary. You will want to know when the rate will rise and how high it can be. Many HELOC rates will be capped at a certain number of points above prime, but this rate can be quite high. You really should know what the maximum payment could be so that you can plan.
#2 Rate Markups Will Vary
Lenders may say that the interest rate is based upon the prime rate, and it may be. But you should know that your rate is based upon prime – plus a markup. So, if the prime rate is 3%, and the mark up is 2%, you will pay 5%. Whatever the rate is, you always will pay 2% more. So you might want to look around and see if different lenders charge different mark ups.
#3 Intro Rate Mark Ups Can Vary
The difference between the base rate and the rate you pay – or margin – can vary. You might get a short term margin discount to get you in the door. Do not assume that the mark up discount will continue long term.
#4 Lenders Offer a Variety of Rate Caps
Your HELOC can have a rate that goes up and down, up to a specific, maximum cap. You should really understand how high the rate can go. This could be very important if HELOC rates start to rise fast.
#5 Draw Periods Can Differ
You may take money out of your line of credit during your draw period. After the draw period concludes, you may not pull out more funds. Then you have to start paying it back. While the draw period is underway, you usually just pay interest. Once it is over, you pay interest and principal. Obviously, you need to know how long the draw period lasts.
#6 You May Have to Make a Balloon Payment
To lower your monthly payments during your repayment period, the lender could put one big payment at the end of the term. This is called a balloon payment. This is ok, but you need to know so that you have the money when needed.
#7 Lender May Mandate a Minimum Balance or Withdrawal
If the lender mandates a minimum withdrawal amount or a minimum borrowed balance, you lose flexibility, which is a major benefit of a HELOC loan.
#8 Inactivity Fees Cost You
Some lenders will charge you a fee for not pulling out cash. This means you are being charged for nothing, which we never like.
#9 Prepayment Penalties Are Costly
If you decide to sell your home, you need to pay off the HELOC. But the lender could charge you a fee if you prepay the loan or cancel the HELOC.
#10 Rates Are Rising – Act Soon
The Fed has already raised rates twice in late 2016 and early 2017. It also has promised another hike could happen this year. This has caused a steady rise in interest rates. But the rates are still in the 4% range, and few thing that rates will go above 5% this year.
Still, if you are considering a HELOC, you will almost certainly pay less now than you will in a year. So we advise if you are thinking of pulling the trigger to do so soon before home equity rates go up another .5%.
Getting a HELOC is a fantastic way to use your equity in a way that pays you back. We recommend pulling out cash to invest in real estate, or to fix up your home and increase its value.
HELOC loans are much more common now than they were just a few years ago. With more lenders getting back into the home equity line of credit game, you should be able to shop around and find lower HELOC rates.
If you keep our above tips in mind, we think that you will be able to score a great HELOC rate.