All You Need to Know About Home Equity Loans

Home Equity LoansAs you pay down your first mortgage or the value of your home increases, you develop equity. When you have equity built up in your home, borrowing against it with a home equity loan is a great way to tap into the money when you need it most. Many people take out a home equity loan to finance home improvements, pay for their child’s college education, cover unforeseen medical costs, and many other purposes. Here’s all you need to know about home equity loans.

What is a home equity loan? 

A home equity loan (HEL), or second mortgage, is a secured loan that allows homeowners to borrow against the equity in their home. The loan amount is based on the difference between the home’s current market value and the homeowner’s outstanding mortgage balance. Home equity loans tend to be fixed-rate, while the typical alternative, home equity lines of credit (HELOCs), generally have variable rates and allow the borrower to withdraw funds as needed.

How is a home equity loan amount determined?  

Your primary mortgage is the amount you borrowed when you first purchased your home. Over time, as you pay down the loan and/or the value of your residence increases, so does your equity. You can take a home equity loan out against the equity you have built up in your home, essentially borrowing against your home’s value minus what you still owe on your mortgage. It’s important to note that a home equity loan is a second loan against your home. You’ll still need to pay your primary mortgage along with new payments for your home equity loan.

A lender will typically want you to have at least an 80 percent loan-to-value (LTV) ratio once your home equity loan has been approved.

Interest rates on home equity loans 

Home equity loans typically have a fixed interest rate, making budgeting for the payments easy. The lender provides a lump sum payment to the borrower, which is then repaid over the life of the loan, along with a set interest rate. Both the monthly payment and interest rate will remain the same over the entire loan term, which can last anywhere from 5 to 30 years. If the borrower sells the home before the loan term is matured, the loan must then be repaid in full.

A home equity loan can be a great choice for a borrower with a one-time or straightforward cash need such as a home addition, large medical expenses, debt consolidation, or a wedding.

Are there any costs associated with home equity loans?

As with mortgage loans, there are closing costs associated with home equity loans. Closing costs refer to any fees incurred when originating, writing, closing, or recording a loan. These fees include application, appraisal, title search, attorney fees, and points. Some lenders may advertise no-fee home equity loans which require no cash at closing, but these will usually have other associated costs or a higher interest rate which can easily offset any gains.

What are the pros and cons of a home equity loan?

There are several advantages to taking out a home equity loan to fund a home improvement project or a large expense:

  • The amount of interest paid toward a home equity loan may be tax-deductible.
  • Interest rates on HELs are generally lower than those provided by credit cards or unsecured loans.

Home equity loans do have some disadvantages as well:

  • Using your home as collateral for the loan means risking foreclosure and the loss of your home if you default on the loan.
  • If your home value declines over the term of the loan, you may end up owing more than your home is worth.
  • You’ll need to pay closing costs and other fees when you take out a home equity loan.
  • You may qualify to borrow more than you actually need and ultimately end up using more than planned, which of course you’ll need to repay.

The hot real estate market has led to a boom in popularity for home equity loans. However, it’s important to weigh all factors carefully before determining if a home equity loan is best for your specific needs.

Freedom has Home Equity Loans and Home Equity Lines of Credit available.  Visit freedomfcu.org/personal/home-loans/ for more details. 

Your Turn: Do you have questions or advice about home equity loans?  Talk to us on Facebook, LinkedIn,Twitter, or Instagram @FreedomFedCU.

 

3 Famous Scary Stories and What They Teach Us

3 famous scary stories

It’s that time of year again! The nights get longer. Haunting winds rattle shutters, and swaying trees cast spooky shadows in the moonlight. It’s time to tell ghost stories!

These stories scare us, but they can also show us something. Let’s see what three of the most popular ghost stories can show us about financial responsibility for a spook-tacular Halloween!

1) The Ghost in the Attic

The Story

It starts a little differently each time. Maybe there’s a bump in the night. A squeaky floorboard creaks and groans even when no one is walking near it. More and more squeaks and bumps that no one can explain keep happening. The cabinets open and close by themselves. Loud noises come from nowhere in the middle of the night. Everyone is terrified, and no one can sleep. Blood starts dripping from walls as screams come from the vents and doors slam. This house is haunted.

It turns out there’s some history to the house. A gruesome murder took place there. It was built on an ancient Native American burial ground. The attic was home to an abandoned child who was forced to live there because of his hideous deformity. The only way to get back to normal is to give these angry spirits what they need.

The Reality

If your house has creaking floorboards, or your heating and cooling system goes bump in the night, you might be headed for a far more serious problem than ghosts. Unexplained noises in the house could be signs of serious structural problems. Knocks in the walls can be a plumbing issue about to break loose. Uneven construction can really make cabinets open by themselves and doors slam uncontrollably. Like in the story, many of these problems come out of your house’s history. It might have been built on an old mine site or just built in a hurry.

Left untreated, these little problems can create big trouble. Squeaky floorboards can break, pipes can rupture and foundation problems can ruin your home. If you’re counting on homeowners insurance to pay for these accidents, think again. Homeowners insurance policies broadly don’t cover “construction defects,” which means you’ll be stuck holding the bill.

Consider getting out in front of these problems. You can use your home equity line of credit to repair your foundation, fix structural problems in your home and perform other necessary upgrades. Don’t let the specter of uncertainty ruin your ghoulish good time!

2) Vampire Infestation

The Story

Up a winding mountain pass deep in the Transylvanian high country sits an ancient mansion. The simple folk who live in the valley will not go near it, nor will they even speak a word about it, for fear of attracting the dark attention of the master of the house. The man is never seen and the house might be assumed empty if it were not for the ominous cackling that echoes through the farms and pastures that surround the mountain.

Legend tells that the man in the mansion is an unholy abomination who subsists on the blood of the innocent. Young children have been found by the road leading up to the mansion, their flesh cold and clammy as though the life itself has been drained out of them. Travelers who arrive at the village scoff at the tale of Dracula’s Mansion, but those who journey up to it are never seen again.

The Reality

While you don’t have any vampires in your life (probably), you do have something you never see that’s sucking the life out of your financial success. Outstanding debt is a seldom-seen figure that casts an ominous shadow over your household finances. Make no mistake: The beast is feeding on your innocent salary and putting your whole household in its sight. The average household has $17,000 or more in debt and faces an average minimum payment of $423 per month.

If you want to drive a stake through the heart of this monster, consider a debt consolidation loan. These loans can repair your credit, lower your monthly payment and free you from the control of the heartless creature. Best of all, you won’t need to deal with the smell of garlic!

3) Zombie Apocalypse

The Story

The streets are quiet. There are no cars or pedestrians. An overcast sky casts flickering shadows on the desolate streets. The ordinary noises of a city are starkly absent. The only clearly audible sound is the slow chomping of the walking dead who are feasting on the bodies of recent victims.

Cowering in basements and perched on rooftops, human survivors band together. Their goal is simple: Stay alive for one more day. Long past the point where rescue helicopters stop flying, these brave souls will go their own way and resist being part of the zombie horde.

The Reality

Zombies are a cautionary example of what happens to us when we consume just for the sake of consumption. A zombie is a sad creature who lacks the capacity to plan or see further than the next meal. We’ve all been there – splurging on a candy bar in the checkout lane, not because we were hungry, but because we wanted it and it was there.

The best way to zombie-proof yourself is to make a realistic budget and stick to it. Make a plan for your income that includes saving and investing. Be sure to include space for planned indulgences – like discount Halloween candy on Nov. 1.

Sources:

http://homeguides.sfgate.com/homeowners-insurance-cover-foundation-repair-63590.html

http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

http://www.free-online-calculator-use.com/credit-card-minimum-payment-calculator.html