If you are planning for a major purchase or consolidating debt, a line of credit from your home equity is a popular option. A Home Equity Loan or Home Equity Line of Credit (HELOC) gives you access to cash using your home as collateral at a relatively lower interest rate compared to credit cards.
Are you financially ready to take on a Home Equity Loan or SESLOC’s new HELOC FlexLine? Before you start the application process, it’s important to ask these three questions.
How Much Debt Do I Currently Have?
Before taking a Home Equity Loan or HELOC FlexLine, it’s important to take a step back and re-evaluate how much debt you are carrying right now. Any loan against your home is considered a “second mortgage,” which means your home could be repossessed if you stop making payments on the loan.
Using home equity to pay down high-interest credit cards is trading one debt for another. If you were to continue to spend out of control on those cards, adding the Home Equity Loan or HELOC FlexLine can make you more vulnerable to financial difficulties. Before you start the application process, take a step back and evaluate how much debt you have, so you can ensure a new (or consolidated) payment is affordable for your budget.
What Am I Using My Home Equity Credit For?
There are many reasons homeowners consider taking credit against their home equity. Some of the more common reasons include consolidating high-interest credit card debt, paying for expansive home renovations, or funding a child’s college education.
Understanding your “why” for seeking a Home Equity Loan or HELOC FlexLine will help you set smart goals. For example: If you are consolidating credit card debt, then your “why” should include not only paying down that loan on time, but also a plan to reduce or eliminate your spending on credit cards so you don’t end up with another big balance down the road. If you are doing home repairs or upgrades, it’s important to consider your savings from additions like energy-efficient appliances alongside estimating the value added to your home when it’s time to sell.
Do I Have a Plan to Pay It Back in Time?
Before taking on any new debt, it’s crucial to determine how long it will take to pay off. There are different ways you can elect to pay it back based on your goals.
For credit card consolidation and major purchases, it’s key to understand how much credit you are taking and what it will cost to pay that debt down. This is where it’s important to decide between a Home Equity Loan and a HELOC FlexLine. Home Equity Loans are fixed-term loans where you receive one lump payment with equal monthly payments each month, making it a little easier to budget for.
HELOC FlexLine is great for those situations with a flexible budget, like home renovations or financing an education, as you can choose how much to take from the line of credit for an extended period. When you want to “lock in” a portion of your loan, you can convert part of your balance into a fixed-rate segment—with up to five segments any time during the draw period ($5,000 minimum per segment).1 Otherwise, the variable rate is indexed to Prime rate, with a floor of 4% APR, and a lifetime rate cap of 18% APR.2
If you are planning on an investment to improve your home’s value, you will need to determine if you plan on living there for an extended period or are making the upgrades in preparation for selling. Should selling be in your plans, you could pay off the home equity credit (the “second mortgage”) with the proceeds from selling your house. Just be sure that the cost of the upgrades justifies taking the credit and won’t leave you with a balance after the sale.
Using your home’s equity to pay for life’s expenses can be a smart way to make the financial burden easier, but only if you have a plan to put it all together. Understanding how the payments will fit into your budget, your overall goals and working with a professional can help you navigate your situation to ensure you’re making the best decision.
Not sure what type of home loan or line of credit is right for you? Want to consider all your home loan options? Contact us today and get started on the right path for your financial goals.
*APR = Annual Percentage Rate
1. HELOC Flexline: Includes an option to fix the rate on a portion or segment of the outstanding variable rate balance. This may be requested up to five (5) times during the draw period of the account. The minimum requested amount for a fixed rate segment is $5,000. The terms, including the APR and minimum monthly payment on the requested segment, will be fixed until paid off. APR and terms for a fixed rate segment are determined by creditworthiness and CLTV (combined loan to value). Term options include 60 months (5 years), 84 months (7 years), 120 months (10 years), 180 months (15 years) and 240 months (20 years), not to exceed the maturity date of the loan.
2. APR (Annual Percentage Rate) is a variable rate indexed to the Wall Street Journal Prime rate. Your rate may increase or decrease during the loan term based on corresponding changes in the Prime Rate. APR is based on creditworthiness and CLTV (combined loan to value). Actual APR will be discussed at the time of application. The floor APR is 4%; your APR will never exceed 18%. Your minimum monthly payment during the 10-year draw period will equal the finance charges (interest) that accrued on the outstanding balance during the preceding month. Your minimum monthly payment during the repayment period (never exceed 20 years) will be set to repay the outstanding balance, at the prevailing annual percentage rate, within the repayment period. Your payment will change if the annual percentage rate increases or decreases. Your payment will never be less than the smaller of $50, or the full amount that you owe.