borrowing

Is It A Good Idea To Open A HELOC Now?

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If you’re looking for a large sum of money to use for a home improvement project, or thewoman looking at computer economic devastation of COVID-19 has left you in desperate need of cash, consider tapping into your home’s equity. One great way to do this is by opening a home equity line of credit, or a HELOC. Let’s take a closer look at HELOCs and why they can be an excellent option for cash-strapped homeowners in today’s financial climate.

What is a HELOC?

A HELOC is a revolving credit line allowing homeowners to borrow money against the equity of their home. The HELOC is like a second mortgage on a home; if the borrower owns the entire home, the HELOC is a primary mortgage.

Given that a HELOC is a line of credit and not a fixed loan, borrowers can withdraw money from the HELOC as needed rather than borrowing one lump sum. This allows for more freedom than a loan and is especially beneficial for borrowers who don’t know exactly how much money they’ll ultimately need to fund their venture.

Borrowers withdraw funds (aka “draws” or “advances”) from the HELOC during a set amount of time that is known as the “draw period,” which generally lasts 10 years. Some lenders place restrictions on HELOCs and require borrowers to withdraw a minimum amount of money each time they make a draw, regardless of need. Other restrictions include the requirements to keep a fixed amount of money outstanding, or to withdraw a specific sum when the HELOC is first established. At Destinations Credit Union, we allow borrowers to borrow up to the limit that you qualify for as you need it.

How do I repay my HELOC?

Repayment of HELOCs varies, but is usually very flexible.

Many lenders collect interest-only payments during the draw period, with principal payments being strictly optional. Others require ongoing monthly payment toward both principal and interest.

When the draw period ends, some lenders will allow borrowers to renew the credit line and continue withdrawing money. Other lenders require borrowers to pay back the entire balance due, also known as a “balloon payment.” Still others allow borrowers to pay back the loan in monthly installments over another set amount of time, known as the “repayment period.” Repayment periods are generous, lasting as long as 20 years.

How can borrowers spend the money? 

While home improvement projects are popular uses for HELOCs, borrowers are free to spend the money however they please. Some other uses for HELOCs include debt consolidation, funding a wedding, adoption, dream vacation or the launch of a new business.  Current tax laws may allow you to deduct the interest on a HELOC if it’s used for home improvements.

Is everyone eligible for a HELOC?

Like every loan and line of credit, HELOCs have eligibility requirements, which help lenders determine the applicant’s financial wellness and responsibility. Most notably, the borrower must have a minimal amount of equity in the home.

Lender requirements vary, but most homeowners will be eligible for a HELOC with a debt-to-income ratio that is 40% or less, a credit score of 620 or higher and a home assessment that stands at a minimum of 15% more than what is owed.

How much can I borrow with a HELOC?

HELOC amounts vary along with three criteria: the value of your home, the percentage of that value the lender allows you to borrow against and the outstanding amount on an existing mortgage.

To illustrate, if you have a $300,000 home with a mortgage balance of $175,000 and your lender allows you to borrow against 85% of your home’s value, multiply your home’s value by 85%, or 0.85. This will give you $255,000. Subtract the amount you still owe on your mortgage ($175,000), and you’ll have the maximum amount you can borrow using a HELOC, which is $80,000.

What are the disadvantages of a HELOC?
A HELOC is secured by your home’s equity, which places your home at risk of foreclosure if the HELOC is not repaid. Before opening a HELOC, it’s a good idea to run the numbers to get an idea of what your monthly payments will look like and whether you can easily afford to meet them.

Also, many lenders require the full payment of the HELOC after the draw period is over. This can prove to be challenging for many borrowers.

Finally, if you don’t plan to stay in your home for long, a HELOC may not be the right choice for you. When you sell your home, you’ll need to pay off the full balance of the HELOC. You may also need to pay a cancellation fee to the lender.

A HELOC can be a great option now

HELOCs have variable interest rates, which means the interest on the loan can fluctuate over the life of the loan, sometimes dramatically. This variable is based on a publicly available index, such as the U.S. Treasury Bill rate, and will rise or fall along with this index, though lenders will also add a margin of a few percentage points of their own.

The fallout of COVID-19 may impact the economy for months, or years, to come; however, there is a silver lining among the rising unemployment rates and bankrupt businesses: historically low interest rates. The average APR for fixed 30-year mortgages has hovered at the low 3% for months now, and experts predict it will continue falling. The low rates make it an excellent time to take out a HELOC with manageable payback terms.

The economic uncertainty the pandemic has generated also makes it a prime time to have extra cash available for any need that may arise.

Are you looking to tap into your home’s equity with a HELOC? Call, click, or stop by Destinations Credit Union today to get started. Our favorable rates, generous eligibility requirements, and easy terms, make a Destinations CU HELOC a great choice.

Your Turn: How are you using your HELOC? Tell us about it in the comments.

Sources:
https://www.huffpost.com/entry/coronavirus-time-to-refinance-interest-rates
https://www.thepennyhoarder.com/debt/is-heloc-good-idea/
https://www.bankrate.com/home-equity/heloc-rates/

How To Fund An Emergency

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Q: Help! I’ve been hit with a financial emergency and I don’t know how to pay for it! Woman standing in flooded houseWhat are my options?

A: Ideally, you’ll want to have an emergency fund in place for this very reason. If you don’t, or the money you have set aside isn’t enough, you have several options to consider.

We’ve listed some ideas below. Be sure to review the pros and cons of each before determining which option(s) will work best for you.

1.) Credit cards

For many people, when faced with staggering and unexpected bills, the default option is to pull out their plastic. Unfortunately, following this trend can put you on the fast track toward a lifetime of debt and playing catch-up because of this one-time emergency.

Credit cards offer incredible convenience. With your card in hand, you don’t have to wait for approval, take on another source of debt, or even think about how you’ll pay for it all until later.

When you borrow with a credit card, though, you’ll get more than you bargained for. With interest rates that can soar (in some cases, to an astronomical 30%), you’ll end up paying a lot more money than what you initially borrowed.

To make it worse, credit cards are designed to keep you in debt. They make it easy to push off paying what you owe by only requiring a minimum monthly payment. With accrued interest, paying only the minimum each month means you’ll hardly be making headway on that debt at all and will end up carrying it for a lot longer than planned.  (Please note: Destinations Credit Union has a fixed-rate credit card so you will know in advance if rates ever change.)

2.) 401(k) loans

You may not have an adequate emergency fund on hand, but what you may have is funds sitting in your retirement fund. But, should you crack open a 401(k) to pay for a financial emergency?

Borrowing money from a retirement fund should only be used as a last resort. It’s really advisable only for those whose credit has been shot and won’t qualify for another loan. 401(k) loans have a low interest rate, but will affect your future financial stability in ways other loans will not. For this reason, experts only recommend borrowing from a 401(k) if you are completely secure in your job and the money will be used for a sound investment. Using this money to fund a medical emergency or household repair is not such an investment.

Also, payments for the loan will be taken out of your future paychecks, so be sure you can afford less regular income before borrowing from a 401(k).

3.) Friends and family

For many, friends and family are the obvious answer when you need someone to bail you out during a rough time.

But is this solution really so obvious?

For some, it may very well be the case. Borrowing from friends and family means borrowing without interest and being granted generous loan terms. However, it can also get sticky, fast.

Only borrow from people you know and love with these guidelines in place:

  • Have a clear repayment plan in place and be sure you can stick to the set timeline. Don’t accept any offers of “pay me back in 10 years,” or that debt will be haunting you for a very long time.
  • Write down the loan terms and create a shared contract detailing all of the terms and the repayment plan.
  • Consider having a third party witness the loan and sign the contract.
  • Keep your financial and personal relationship separate. As long as you’re making your payments on time, there’s no reason to discuss the loan every time you speak.

Borrowing from those you hold most dear means putting a cherished relationship in jeopardy. Do not go this route unless you are confident your relationship can stand up to the test and you are absolutely sure you can repay on time.

4.) Personal loans

Personal loans exist for reasons like these. Since they have no explicit purpose, you won’t need to give any lengthy explanations for why you need the money and you should have the funds in hand rather quickly.

Unfortunately, though, personal loans are unsecured and most of them come with high interest rates and fees. You’ll also need to have decent credit to qualify. As a member of [credit union], though, you have access to personal loans with affordable rates. They may just be your way out of a financial bind!

If you think a personal loan might be right for you, call, click or stop by Destinations Credit Union today to learn all about our rates and payment options. We’re always here to help you out!

Setting up an emergency fund

It might be too late right now, but it’s never too early to start thinking about the future. Start setting up your emergency fund today so you’re never stuck in a tight spot again.

Here’s how to make it happen in five simple steps:

  • Create a goal for your fund. Ideally, an emergency fund should have enough cash to cover your living expenses for 3-6 months.
  • Review your monthly budget to find places to cut back. Alternately, look for ways to boost your income.
  • Determine how long it will take you to reach your goal by allocating the saved or earned money to your emergency fund.
  • Open a savings account specifically for this purpose.
  • Set up automatic monthly transfers from your checking account to your emergency fund.

Now you can sit back and watch your emergency fund build itself into something substantial that will help you sleep better at night. From here on, unexpected expenses or setbacks won’t throw you for a loop. You’ll be prepared for anything!

Your Turn: Do you have a secure plan in place for emergencies?

SOURCES:
https://www.google.com/amp/s/www.forbes.com/sites/peterlazaroff/2017/09/23-how-to-set-up-your-emergency-fund/amp/  
https://www.google.com/amp/s/www.bankrate.com/retirement/4-reasons-to-take-out-a-401k-loan/amp/  
http://www.businessinsider.com/how-to-borrow-money-from-friends-family-2013-1  
https://www.nerdwallet.com/blog/loans/personal-loan-why-should-i-get/  
https://www.thebalance.com/why-using-your-credit-card-for-emergencies-is-risky-960992