5 Myths Busted About Home Equity Lines of Credit

  • 09 Nov 2018
  • Posted by kpassman

It’s funny how sometimes a myth can be taken as fact if it’s repeated often enough. It can even gain “conventional wisdom” status.

Sometimes it doesn’t matter much. It’s pretty harmless to think a tooth will dissolve overnight in a glass of Coca-Cola, and it may do some good if it keeps you away from the sugary drinks. But believing banking myths can hurt your personal finances – and there’s nothing good about that.

For example, a number of myths swirl around home equity lines of credit (HELOCs), and many of these misrepresent what is actually a safe and secure way to borrow money. With a HELOC, you can access a line of low-interest credit secured by your home’s equity – much like you would with a credit card, only the interest rate is usually much lower than credit card rates.

So today we want to take a few minutes to bust a few HELOC myths – and let you know the truth…

Myth No. 1: You Can Only Use a HELOC to Pay for Home Improvements

It’s true that HELOCs were initially created with home improvements in mind. However, the fact is that you are allowed to use your HELOC to pay for just about anything – from debt consolidation to your children’s college tuition. That said, most advisors think homeowners should use their HELOCs for expenses that add value to your finances. For a list of our own suggestions, click here.

Myth No. 2: A HELOC and a Home Equity Loan Are the Same Thing

With a home equity loan, your lender will provide you with a one-time lump sum. You pay that fixed-interest loan off over time, month by month. With a HELOC, however, the bank extends to you a line of credit that you can draw upon whenever and as often as you like, within your draw period. While the interest rate is generally low (much lower than that of a credit card), it fluctuates along with the prevailing rate.

Myth No. 3: A HELOC Will Hurt Your Credit Score

On its own, a HELOC should not affect your credit score. It shows up to credit scorers no differently than a credit card. But just as with any other debt you incur, late payments on your loan or maxing out your HELOC may affect your credit score. It’s wise to ensure that you do not advance your line over the approved credit limit as this also would reflect on your credit report.

Myth No. 4: You Can Pay Off Your HELOC by Making Minimum Monthly Payments

With most HELOCs, if you make only the minimum payment each month, you’ll only cover the interest. Once the “draw period” – the five to 15-year stretch of time when you can use your HELOC – ends, the principal starts becoming due. Depending on how much you’ve used, that can be a lot of money. So the best strategy, much like with a traditional credit card, is to make much more than the minimum payment each month.

Myth No. 5: HELOCs Are Difficult to Get

Because banks are more stringent with making HELOC loans than they were before the financial crisis, many consumers assume they’re impossible to get. The fact is, however, many current homeowners can qualify for a HELOC. Banks are tougher than they used to be, but they’re still making many, many loans of all sorts to qualified customers. Plus, you can apply for a HELOC nearly immediately after you buy your home.

Taking out a HELOC is not risk-free. But if you use your HELOC conservatively and pay more than the minimum due each month, it is among the best loan options out there. 

If you’re ready to apply for a HELOC, or for more information, please contact us

Written by Kathy Passman
Kathy Passman is the Vice President, Consumer Lending Manager at Howard Bank. She 
has lead the Consumer Lending Department since 2012 and holds over 20 years of experience in the industry. 

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Should You Use Your Home Equity Line of Credit For That?

  • 08 Nov 2018
  • Posted by kpassman

We’ve all heard the stories about people, before the 2008-’09 financial crisis, using their homes as “ATMs.” I’m talking about homeowners using the equity in their homes to pay for luxuries – jewelry, vacations, even cosmetic surgery.

That’s poor financial management, and a lot of those folks got themselves in real trouble. Today, most homeowners seem to have learned that lesson. Instead, when homeowners do take out a HELOC, it's often being used solely as an emergency fund.

But this approach may not be the wisest choice for your money, either. There is, in fact, a middle ground between abusing the credit your home equity affords you and using it wisely.

What Is a HELOC?

A HELOC is different from a home equity loan, in which you get a lump sum amount, then pay it back according to a schedule. A HELOC makes a percentage of your home’s value available for five to 15 years, and its interest rate adjusts with the market. When it expires, you only pay for what you’ve used – then it disappears with no additional expenses.

Any loan or line of credit carries some risk, and a HELOC, for which you use your home as collateral, is no different. But if you are savvy and conservative, a HELOC is a safe and secure way to pay for a number of life’s major expenses. Let’s take a look at a few of them…

College Tuition

Because the interest rates could be lower than those on student loans, using a HELOC to pay parts of your child’s college tuition could be a good option. Compare interest rates and closing costs to see if a student loan or a HELOC is cheaper for you.

Home Improvements

HELOCs were designed to be used for home repairs and renovations. And that’s still the primary reason homeowners take them out. However, we recommend you use a HELOC primarily on improvements that increase a home’s value. That way, any interest you pay will return to you when you sell your home.

A HELOC is also good for financing essential repairs that may not raise the value of your home but will upgrade its safety and/or structural integrity. In this case, I’m talking about fixing a leaking roof or replacing faulty wiring.

For other home improvements, such as interior design and landscaping, tap your cash savings (though not your emergency fund). Or, put it on your credit card and pay it off at the end of the month. That way you can ensure the equipment you buy – and pick up some points.

Emergency Fund

Everyone should keep an emergency fund to cover unexpected health bills, car repairs, and home repairs. Where you keep that emergency fund depends on your situation and financial philosophy. Some people believe that any money that isn’t “working for them” is useless. They keep their emergency fund in an easily accessible interest-paying savings account.

However, the interest rates on savings accounts are pretty measly these days. And so, you might be better off piling most of your cash into a stock market index fund. It’s not very sexy, but it earns more than a savings account. Then, use your HELOC as your emergency fund.

Consolidating Debt

Besides what you pay off at the end of every month, do you have any credit card debt? If so, get rid of it. Use your cash to pay off what you can, and then pay down as much as you can of the rest using a HELOC. Home equity lines of credit charge much less interest than credit cards, so you’ll be saving money. Plus, unpaid credit cards hurt your credit score and, therefore, your chances of getting loans in the future.

If you consolidate debt using a HELOC, you’ll get out of debt faster thanks to those lower interest rates. Plus, you’ll essentially be paying yourself rather than Visa or MasterCard.

If you’re ready to apply for a HELOC, or to talk more about the best ways to use a HELOC you already have, please contact us.

Written by Kathy Passman
Kathy Passman is the Vice President, Consumer Lending Manager at Howard Bank. She 
has lead the Consumer Lending Department since 2012 and holds over 20 years of experience in the industry. 

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What's a Good Use for a HELOC?

  • 22 Jun 2017
  • Posted by Amarasco

When you take out a second mortgage, a name for a home equity line of credit, you're offering your house as collateral to secure another loan. The upside: You can gain access to up to 85% of your home's value, minus your current mortgage balance and adjusted based on your creditworthiness.

The downside? If you can't make your payments, you could lose where you live. Because the stakes are high, you want to make sure you use a HELOC for the right reasons. Here are a

few.

Making home improvements

Most people who take out a HELOC do so to make home improvements. Experts say you should only do this if the improvements you're considering will increase your home's value. This way, the money you're borrowing will be returned when you sell your house at a higher price.

The National Association of Realtors' 2015 Remodeling Impact Report lists these six changes as the ones with the best return on investment:

  • Installing a new front door.
  • Installing new siding.
  • Upgrading your kitchen.
  • Adding on to your deck and patio.
  • Making an attic into a bedroom.
  • Installing a new garage door.

These improvements can range from a few hundred to tens of thousands of dollars, but they don't change the footprint of your home and tend to be what future buyers look for.

Supplementing an emergency fund

Everyone should have an emergency fund to cover events such as unexpected car repairs and appliance breakdowns. Most people keep these in savings accounts, but you might consider a home equity line of credit as another source of cash. You only pay interest on the amount you borrow, and you could pay the loan off quickly to save money. Still, it makes more sense to have an emergency fund that's earning a little interest rather than one that charges you interest.

Paying off high-interest debt

Because the average interest rate on a HELOC is much lower than the average credit card interest rate, many people think about using a HELOC to pay off their credit cards. This is a great strategy if you're committed to never carrying a balance again. Otherwise, you're just adding another debt at a lower rate.

Regardless of how you use a HELOC, remember that the interest rate is variable and may change each time you tap it. And you'll have to repay the entire loan by the end of the payment period set by the lender. On the upside, the interest you pay on a HELOC is tax deductible, like your mortgage interest. If you use a HELOC for the right reason, that's just one more benefit.

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