Home values have suffered all over the United States in the last few years, but there are many people who have continued to work hard to build equity in their home. One great way to utilize this equity is through a home equity line of credit (HELOC).
If you have a credit card, you already understand the basic functions of a HELOC: revolving, open credit line is available to be used as the borrower wants. The major difference between your credit card account and a HELOC is the collateral used to secure the credit; a credit card is usually unsecured (not tied to anything), while a HELOC uses your home to back the credit.
Because it is real estate-secured, there is a second major difference between a credit card and a HELOC: the interest paid on outstanding balances on a HELOC may be a benefit at tax time, whereas credit card interest is not. You’ll want to speak with your tax advisor for more details about any impact real estate interest could have on your personal income taxes.
Using a HELOC to make a major purchase or in case of an emergency can be a significantly better option than putting a large dollar amount on a credit card because of potential tax benefits. Another great use of a HELOC is debt consolidation; if your family has balances carrying over from month to month on high-interest credit cards, consolidating them onto a HELOC could save money now and later.
Here are a few key terms with which you should be familiar before shopping for a HELOC:
Interest Rate – the interest rate used to determine the cost of borrowing the money. This is stated as an annual rate, and as a percentage of the loan or line amount.
Annual Percentage Rate (APR) – this is the actual cost of the credit, stated as an annual rate. This can be different from the interest rate. In the case of a loan (auto, mortgage, etc), the APR includes the interest rate plus any included fees (points, broker fees, application and closing costs, title fees, etc).
Variable Interest Rate – many HELOCs come with an interest rate that is not fixed, but is related to an index (such as the “prime rate”). The rate of interest applied to outstanding balances on the line of credit would be stated in relation to the index (ex: prime plus 1.00 percent). As the index moves up and down, the interest rate mirrors those changes.
Rate Lock – some HELOCs allow borrowers to lock the rate on an outstanding balance, which effectively converts a portion of the HELOC into a loan. This is an advantage for borrowers who are concerned their variable rate could go up. At Popular Community Bank, we allow borrowers to lock balances as well as unlocking any portion of their Equity Advantage Line of Credit. Borrowers can lock as many as three separate portions of their Equity Advantage Line of Credit.
Cap (Interest Rate) – this refers to the limit your variable interest rate can increase. A periodic adjustment cap refers to the largest increase in a single adjustment period, while a lifetime cap establishes the largest possible increase in the life of the loan/line. By law, all adjustable-rate mortgages have an overall (lifetime) cap.
Application Fee – this refers to any costs that must be paid to begin processing an application for a loan or line of credit.
Closing Costs – this refers to costs that must be paid when a loan/line closes (is signed).
Credit Limit – the total amount of available credit.
Equity – this refers to the difference between the value of the real estate used to secure the credit and the outstanding amount owed on the primary mortgage(s).
Draw Period – the amount of time the line of credit is available. At Popular Community Bank, the draw period for our Equity Advantage Line of Credit is ten years.
Minimum Payment – this refers to the smallest amount you need to pay to keep the account in good standing; you don’t have to pay the line of credit all the way to $0 every month. Some plans require the minimum payment to only cover interest, while others require a payments that include both principal and interest. At Popular Community Bank, the minimum payment is interest only (or $20, whichever is greater).
If you have any questions about an existing line of credit, either with Popular Community Bank or somewhere else, or if you’re interested in more specific information, contact your local branch for more information.