Five Things You Need to Know About Home Equity Lines

For most people, a home is the largest investment they will make in their lifetime. It also is one of their largest assets – which can be used to help see you through varying financial needs during the time you own the home.

One way is through home equity lines of credit.  As homeowners make monthly mortgage payments, they slowly increase the percentage they owe on their home (and reduce the percentage they owe on to a lender).  This ownership percentage is called “equity” which is something a homeowner can borrow against if needed. 

Here are a few answers to frequently asked questions regarding Home Equity Lines…

1.   What is a Home Equity Line?

(HELOC) is a credit line extended to you as a homeowner that gives you access to the equity in your home. The HELOC is typically secured by a second mortgage on your home.

2.   How does a Home Equity Line work?

You must apply and be approved by a lender to open a HELOC. The credit limit is based on multiple credit factors.  The primary factors are explained below:

• the amount of the equity you have built up in your home
• your credit and repayment history
• the ratio of your debts to your income

You can borrow as much as you want, whenever you want, up to the established limit. Depending on the lender, you may be able to write checks or use your online account to access the funds available through the HELOC.

The interest rate typically floats based upon the prime rate and you pay interest only on the outstanding balance. Most lenders allow 10 years of use on the line of credit (the draw period) – and then institute a 10 year payback period (the repayment period).  These timeframes are established by the lender.
You may pay your loan down to zero at any time, the line of credit will still be available for you to use throughout the stated period of the line.

3.   What does a Home Equity Line cost?

Many of the costs of setting up a home equity line of credit are similar to those you pay when you get a mortgage. In many cases, the Lender will take on these costs on behalf of the consumer.

 Example of these costs:

• A fee for a property appraisal to estimate the value of your home;
• An application fee, which may not be refunded if you are turned down for credit; Some HELOC’s qualify for tax deductible interest treatment.  You should consult your tax advisor to determine if your HELOC interest qualifies.

Lenders may charge an annual fee of $35 to $100 or more depending on the Lender.  Make certain you are aware of this fee amount before you enter any agreement. Also, monthly interest charges will be based on your rate and the amount borrowed.

4.   How can I use a Home Equity Line?

HELOC loans are sometimes called debt-consolidation loans because some homeowners use HELOCs to pay off outstanding, high interest rate credit card balances. You may be able to avoid other higher cost forms of borrowing by using your HELOC.

Make note that some HELOC’s qualify for tax deductible interest treatment.  You should consult your tax advisor to determine if your HELOC interest qualifies.

For people who do not have a consistent monthly income (commissioned sales people, people who rely on periodic performance bonuses), a home equity credit line can be used to fund low pay periods and paid back during higher compensation pay periods.  Paying the line of credit back during higher pay periods is a discipline that will help keep your debt in control.

Home equity lines of credit can be also used as emergency funds (furnace repair, medical bill) that can be paid back after use. 

Be sure to keep an eye on interest rates.  Because these are floating rate loans, the interest payment will fluctuate monthly.  You may want to consider moving into a fixed rate loan if you anticipate sharp interest rate increases.

5.   Where can I get a Home Equity Line of Credit?

While many financial institutions offer lines of credit, community banks frequently offer the most competitive rates.  Many offer the convenience of online application or having a Loan Officer meet at a convenient place in lieu of going to the Bank Branch.

 To learn more about how you can benefit from a home equity line of credit, contact your local community bank like Simsbury Bank.  Community banks have knowledgeable professionals who will advise you on the best options for borrowing, from the many types of loans available, for your situation.