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Home Equity Line4Me
A HELOC is a line of credit secured by your home that gives you a revolving credit line, similar to a credit card. Key differences are that instead of borrowing from a credit card company, you're borrowing from the available equity in your home, and the house is used as collateral for the line of credit. Like a credit card, as you repay your outstanding balance, the amount of available credit is replenished. This gives you the ability to borrow against it again if you need to, and to borrow as little or as much as you need, up to your approved limit.
Home equity lines of credit are often used to pay for home improvement projects, including those intended to increase the value of your home. They are also used for major purchases or to consolidate higher-interest rate debt on other loans (such as credit cards).
The following is basic terminology to help understand home equity lines of credit:
Rate Lock Option
A home equity line of credit will typically have a rate that is fixed for a period of 3 - 15 years with established monthly payments. This payment stability can make it easier for budget management.
Contact a MidCountry Bank home equity expert today to discuss rate lock options.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is the rate charged for borrowing funds, and is expressed as a percentage representing the yearly cost of funds over the term of a loan.
Qualifying
In order to qualify for a home equity line of credit, you must have available equity in your home. In other words, the amount you owe on your home must be less than the value of your home. Many lenders will allow you to borrow up to 80% of the value of your home minus the amount you owe. Your lender will also typically look at your: credit score and history, employment history, monthly income, and monthly debts, just like they did when you first applied for your mortgage.
Index
The index is a financial indicator used by banks to set rates on many consumer loan products. MidCountry Bank indexes to The Wall Street Journal Prime Rate.
Margin
The margin is the amount added to the index, such as The Wall Street Journal Prime Rate, to determine the interest rate for your home equity line of credit.
Limit
Your lender will calculate your line of credit limit. Here is an example of the calculation:
Assuming the lender allows a maximum credit limit of up to 80% of your home's value and your home appraises for $300,000, if you owe $150,000 on your current mortgage you may qualify for a credit line amount of up to $90,000. ($300,000 x 80% = $240,000 - $150,000 = $90,000)
Be aware that lenders have the right to modify your credit line at their discretion by decreasing the amount of funds available. In such cases, they are obliged to inform their customers of these changes to their credit limits.
Draw Period
The "draw period" is the period of time during which you can pay for expenses with your home equity line of credit. Depending on the terms, the draw period will vary, but typically it will be up to 10 years. Simply transfer funds to your checking account using online banking or contact your banker to advance available funds for you. For added convenience, you may also have HELOC checks allowing you to advance directly from the HELOC by writing a check.
When you have borrowed against your home equity line of credit, you'll receive a monthly bill with a required minimum payment, similar to the way you would for a credit card. It's essential to make your payments on time, and highly advisable to pay more than the minimum (especially if that minimum covers interest only), so that you're paying down your principal. This may not only reduce your overall debt more quickly, it may also help you save on the interest you pay.
Interest
You will be charged interest for any money that you borrow against your credit line. If your home equity line of credit has a variable interest rate, your interest rate could vary from month to month.
Repayment Period
Home equity lines of credit have an "end of draw" date, after which you may no longer borrow against your home equity line of credit. On this date, the repayment period begins. During the repayment period, you'll be required to make the monthly principal and interest payments needed to fully pay off the home equity line of credit by the end of the repayment period.
Monthly Payment Suggestion
If you were to make interest-only payments during the draw period of your line of credit, you could find yourself with a large balance and unexpectedly large monthly payments when your repayment period begins. To avoid this payment shock, it's recommended that your monthly payments during your draw period cover principal and interest so that you're paying down as much of your principal as possible during the draw period.
Home Equity Line of Credit Checklist
While many lenders offer similar features in their home equity lines of credit, comparing these points as you shop could make a difference in your payments:
- Annual fee: Amount charged once a year for the life of the loan, and sometimes only charged when you do not borrow against your home equity line of credit.
- Cancellation/early closure fee: Fee charged if the line of credit is closed before a certain date (if closed less than 3 to 5 years from the date opened, it could cost from $500 to $1,000).
- Margin: The amount added to The Wall Street Journal Prime Rate to determine the interest rate for the home equity line of credit.
- Minimum draw: The minimum amount a lender requires you to withdraw/ borrow per transaction or advance.
- Introductory rate: A temporary rate that is adjusted after a specified length of time.
- Up-front fees: Some fees are charged by the lender to set up your home equity line of credit like application/and or appraisal fees.
- Automatic payment discount: Discounted interest rate offered by some lenders if you establish automatic payments from a deposit account.
Home equity lines of credit give you the flexibility to use your credit at any time during the term for any expense.
So before you get a home equity line of credit, consider things like what rate structure (fixed or variable) meets your needs. How much you think you'll need to borrow over what period of time?
When borrowing from a home equity line, mortgage, credit card or any other credit product, it's important to borrow only the amount that you can comfortably afford.
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