Every homeowner should know about this smart financial tool
When your house is your own, you are realizing a piece of the American dream. It’s where you make lifelong memories with your loved ones. Homeownership also has financial benefits, like increasing your long-term wealth as your house increases in value or when you pay down the mortgage. Latest 2010-2013 survey reports that a homeowner’s average net worth is 36 times greater than that of a renter ($194,500 vs. $5,400).*
In addition to the long-term benefits, did you know that your house can also give you flexibility to manage your finances more effectively today? It can be a source of comfort and security when you properly take advantage of a home equity line of credit (HELOC). Here’s some actions a HELOC can empower you to do:
Seize opportunities with flexibility
A HELOC gives you the flexibility to access low-cost funds to achieve big goals, like remodeling, paying for college tuition, or consolidating higher interest debt. But beyond these common uses, a HELOC can also be used to seize one-off opportunities. Consider Barbara’s story.
She wanted to jump on an opportunity to buy an investment property, but she didn’t want to sell her stocks and incur capital gains tax this year. Instead, she wrote a check from her HELOC and closed the deal. She later paid down the credit line when funds became available.
Manage your cash flow effectively
A HELOC is a revolving line of credit that uses your home as collateral. For example, if your home is worth $800,000 and you currently have a $600,000 mortgage, you could apply for a $40,000 HELOC. (Most lenders will let you borrow up to 80% of your home’s value at the more attractive interest rate.) If you don’t use the HELOC, you pay nothing. When you want to access the funds, you simply write a check and only pay interest on that amount. Pay the balance down anytime with no pre-payment penalties, while keeping the credit line available for use again in the future.
This pay-only-when-you-use-it feature is especially useful to someone like Arthur, who is self-employed. When the 2008 financial crisis hit, his business took a dramatic downturn, and cashflow was tight. He has an existing HELOC on his home — and used it to help his business survive the downturn.
Some people fear borrowing on their home because they don’t want to lose their home. The key is making sound decisions about debt. For instance, if you are paying an 18% interest rate on a $16,000 credit card debt, paying off this debt with funds from a HELOC with an interest rate of 4.75% would greatly reduce your monthly payments and total interest paid. Or, if you wanted to maintain the same monthly payment, you could apply the difference towards principal reduction. Whenever you borrow one debt to pay off another, be careful not to run up the original debt again!
Prepare for the unexpected
A common rule of thumb is to have 3 to 6 months of living expense saved for an emergency. Even if you have this much saved, having a HELOC in place could give you extra cushion should you need access to cash quickly. And if you’re planning for retirement, now could be the right time to apply so you have that kind of access in the future.
If you’re nearing retirement, you may be striving to own your home free and clear. But real estate is not liquid asset, so if you need cash quickly, you may not be able to sell on your terms. Having a HELOC helps you handle large, unexpected expenses, like a medical bill or roof repair. It also makes sense to apply before you retire when you still have higher income to qualify for the loan.Get Started
*Federal Reserve survey of Consumer Finances 2010-2013.
¹ APR = Annual Percentage Rate. Rates and terms shown are accurate as of 3/9/2018, and apply to a Home Equity Line of Credit or to a Home Equity Loan for the most qualified applicant at the CLTV shown. Rates vary for second or vacation homes. Home Equity Lines of Credit and Home Equity Loans are only available in California on owner occupied and vacation or second homes.
The minimum periodic payment for line of credit is interest-only for the first ten years ('draw period') followed by fully-amortizing payments to repay the balance over the final fifteen years. No draws will be allowed during the repayment period. Payments and rate can adjust monthly. Payments will increase if rates increase. At the end of the draw period, your required monthly payments will increase because you will be paying both principal and interest.
Line of credit rate is calculated using an index plus a margin. The index used is the Prime Rate as published in the Wall Street Journal Western Edition on the last business day of the month prior to the change. The current prime index is 4.50. In no event can your rate increase above 17% APR.
² The minimum credit line amount is $10,000 and the maximum is $500,000. Patelco Credit Union will pay customary closing costs on lines up to $250,000 in second lien position. Borrower is responsible for closing costs on lines in first lien position or over $250,000 and any escrow fees resulting from changes to title. Closing costs range from $0 to $2,500. Borrower may be required to pay a notary fee varying from $1 to $40 to execute the loan documents. Read the HELOC Program Disclosure.
Rates, terms, conditions, and availability are subject to change or withdrawal at any time and without notice. Nothing herein is or should be interpreted as an offer or commitment to lend. Loans are subject to credit and property approval. Other conditions and restrictions may apply. Hazard insurance may be required. NMLS ID Number is 506373.