Home Equity Loans
Though many people don’t realize it, when someone becomes a homeowner, they also become an investor. That’s because buying a home is not merely having a place to live; the purchase of a home is, in addition, the acquisition of an investment. And, since your home really is an asset in your investment portfolio, it’s important to know about a substantial number of financial options designed to help you take economic advantage of your home.
A HELOC (the “technical name of which is Home Equity Line of Credit) makes it possible to take advantage of the equity you have in your home by borrowing against it to finance other expenses or to consolidate high-interest debt(s) into a single loan with lower interest.
While it could be possible to acquire additional funds through a personal loan or credit cards, these choices may not offer the most affordable terms and conditions. That’s because they don’t allow for the possibility of collateral (like your home) to secure the loan.
With a HELOC, financing for any number of needs becomes available to you by borrowing against the equity you’ve built up in your home. A HELOC will allow you to benefit from what you’ve paid into your home—and its increase in value over time—with low-interest financing. Functioning somewhat like a pre-paid credit card, a HELOC permits you to spend the money you’ve been loaned as you need.
These features make HELOCs a popular option for homeowners who need to finance other expenses or reorganize high-interest debt with a lower interest rate and more flexible financing. (See the chart below to compare the two common home equity loans.)
| Feature | HELOC | HELOAN |
|---|---|---|
| Overview | Because the home is security for loan repayment, interest rate typically lower than other consumer loans and is variable | Again, the home is collateral; interest rate usually lower than other consumer loans, with fixed rate |
| Loan Disbursement | When needed (at or just after closing), in the amount needed; basically unlimited access during draw period | At closing (or just after); one-time, lump-sum payment |
| Answers "Yes" |
Is HELOC preferred if . . . *I need funds over time, in varying amounts or at differing intervals? *I don't need all the funds up front and if my finances allow for higher payments should interest rates go up? |
Is HELOAN better if . . . *I have a specific amount in mind for how much I wish to borrow? *I am more comfortable with pre- dictable, fixed payments? |
|
Paying Back the Loan |
—During draw period, repayment is either established minimum OR to replenish funds available from the HELOC —Also in draw period, any interest you owe will be only for funds used (not any unused credit) —After draw period, repayment includes full principal + interest (usually monthly) |
—Upon closing, payments for principal and interest begin |
| Risks |
—Your home is collateral, so not keeping up with on-time payments for your HELOC jeopardizes your homeownership. —HELOCs have variable interest rates which means your monthly payments could rise appreciably if rates go up. |
—Since your home secures a HELOAN, timely monthly payments are indispensable. —Full principal and interest payments begin at (or shortly after) closing. |
Our mortgage loan specialists at Compass Mortgage will help you determine if a HELOC works for you. For some of the basics, we’ve outlined the steps and documentation you’ll need to begin to familiarize yourself with what is involved.
We ask of you . . .
We expect of ourselves . . .
Following are common requirements ordinarily needed to qualify for a HELOC. If you have ANY questions, we’re here to help!
Establishing and achieving financial goals is a source of great satisfaction, and making the most of your home’s financial potential can play a key role. Since you may not have all the answers, it’s definitely OK to have questions! Here are some common questions and answers, but don’t hesitate to ask more.
A HELOC functions somewhat like a credit card, with revolving financing that allows you to borrow, pay back and borrow again during the draw period.
A HELOAN, on the other hand, is more like a traditional mortgage. It’s a loan rather than a line of credit. You borrow one specific amount—the total amount you need—all at one time, receive it as one lump sum and make fixed, regular payments during a set repayment period. The monthly payments, like a typical mortgage, are applied to the principal and interest of the loan.
Both HELOCs and HELOANs offer lower interest rates than most personal loans because your home is used as collateral with the lender.
In most cases, a HELOC is flexible and can be used for any expenses you choose.
Many borrowers obtain a HELOC to cover payments such as student loans, home renovations, start-up business costs, emergencies like medical bills or other purchases for which you might obtain a personal loan, such as buying a car.
Because its interest rates are lower, a HELOC is also great for consolidating and paying down high-interest debt like what is owed on credit cards.
Once your HELOC is approved, you’ll have access to those funds quickly through checks, electronic transfers or a credit card tied to your HELOC account.
When you apply for a HELOC, we’ll work with you to formulate agreed-upon terms and conditions. This will include how long the draw period will be (the time during which you can borrow) and the length of the repayment period.
During the draw period (which, by way of example, could be as much as 10-20 years), you’ll make minimum monthly payments for the amount you have withdrawn. Also during the draw period, you can pay more of your overall balance so that you can continue to borrow against it up to a certain amount, much like how a credit card’s limit operates.
Whenever the draw period ends, you’ll begin the repayment period during which you can no longer withdraw funds and when you initiate paying back the unpaid balance (with interest).
The interest rates for HELOCs are lower than other types of personal loans or credit cards because your home is collateral which helps secure (or guarantee) the loan.
Your home is valuable collateral that the lender can rely on if you can’t repay your HELOC. This makes lending the money less of a risk for the lender so that you can have easier access to financing—and at a lower cost.
Caution, however: You should consider any concerns you might have regarding repaying a HELOC because, if you can’t make payments, your home is on the line for the balance you owe.
Get in touch with a Compass Mortgage loan officer! Along with helping you determine the amount of equity you have to work with, your Compass loan officer will help you evaluate your income as well as the other components of your financial profile in order to guide you toward a workable solution for qualifying.