What You Need to Know About Home Equity Lines of Credit
What is a HELOC?
A Home Equity Line of Credit (HELOC), as the name suggests, is a line of credit. More specifically, it is a line of credit borrowed against the current available equity of a home. The available equity is the home value minus the amount owed on the primary mortgage. It typically is a second mortgage, but people can also get a HELOC if they own their home outright, in which case the HELOC is the primary mortgage.
How do HELOCs work?
There are two phases of a HELOC. The first phase is the “draw” period, and the second phase is the “repayment” period. During the draw period, you borrow only what you need. You will pay interest and make payments based only on the amount you borrowed. As you pay down the balance, the equity becomes available to you again. This phase typically lasts 10 years. The second phase is the “repayment” period. This allows you to pay the remainder of the loan balance, but during this phase, withdrawals are no longer available. This phase lasts typically 10-15 years, depending on the lender.
What are pros of HELOCs?
- While they work similar to credit cards, they are a revolving source of funds but typically offer higher credit limits and significantly lower interest rates than credit cards.
- Borrowers have control of when/if they want to use their HELOC once it is established, similar to a credit card.
- The payment and interest are based on the amount that’s drawn, not the full amount of the HELOC. This allows you to budget your payment per month only drawing what you can make the payments on.
- Interests of a HELOC may be tax deductible if the funds are used to buy, build, or improve the taxpayer’s home that secures the loan.
- The loan can be used as an ongoing line for expenses or home improvements.
- If not in need of immediate funds, it can be used as a “safety net” or “emergency funds.”
What are Cons of HELOCs?
- The rate is variable so there is always a chance it could increase while you are using your HELOC. This will cost you more interest to pay back verses a fixed rate Home Equity Loan where it is a locked rate for the full term on the loan.
- Possibility of overspending
- The payment will increase when additional funds are taken, causing an irregular monthly payment.
- As with any Home Equity loan, you are reducing the equity in your home.
- Since a HELOC uses the value of your home as collateral, failing to repay your HELOC puts you at risk of losing your home.
Is a HELOC right for me?
If you own a home (with equity) and need funds for an important renovation or ongoing expenses, a HELOC may be right for you. This may be a good option due to lower rates and flexible funds versus a personal loan or credit card.
How do Guardian’s HELOCs work?
Guardian’s HELOC’s are a 20-year loan consisting of a 10-year “draw” period and followed by a 10-year repayment period. During the draw period, borrowers can draw from their HELOC’s and use the funds, as needed. Once a draw is made, a monthly payment will be required which will be $100 or 1.5% of the principal balance, whichever is greater. The payments will be distributed towards the interest due, in addition to the principal balance. As the principal balance decreases, those funds are available to the borrower again for use. Once the 10-year draw period ends, members will no longer be able to draw from the line of credit. The borrowers are not entering the 10-year “repayment” period and responsible for repaying the remaining balance. The minimum payment remains the same as the draw period, $100 or 1.5% of the principal balance, to insure the loan will be at a zero balance at the end of the loan term.
Members can access their HELOC funds several ways: free HELOC checks, provided upon request, online transfers, or withdrawing funds directly at a branch.
How do Guardian’s HELOCs rates work?
HELOC rates are variable rates and based on federal prime rate, loan to value (LTV) and credit score. The lower the LTV and the higher the credit score, the better rate you will receive.
Guardian has a base rate that is determined by the current federal prime rate. In addition to the base rate, a rate margin for LTV will be added if the LTV exceeds 80% or credit score exceeds 680. This will increase your rate monthly.
There is a floor of 4.00% APR and a ceiling of 18% APR. The floor is the lowest rate offered for a HELOC. The ceiling is the highest rate a HELOC may be. For example: if the prime rate is 3.00% APR, you will pay the floor of 4.00% APR (plus margin, if applicable). If the prime rate is 19.00% APR, you will pay 18.00% APR (regardless of margin, if applicable).
Benefits of GCU HELOC
- No annual fees
- No closing costs
- No prepayment penalty
Who can apply for a Guardian HELOC?
Any homeowner with equity in their home. Guardian offers Home Equities on primary residences only. Homeowners must qualify for a HELOC based on sufficient income, job security, good credit, and a positive financial history. The maximum equity Guardian will lend up to is 90% loan to value. If minimal equity is available, you may not be eligible for a HELOC.
For more information or to apply click here.
APR=Annual Percentage Rate. All residences used as collateral must not be listed for sale and must be owner occupied. All HELOC’s are subject to credit qualification, other rates and terms may apply. HELOC/Line of credit require a minimum credit score of 650 and LTV (Loan to Value) of 90% or less based on the EFMV of current property tax bill. An appraisal may be required if LTV exceeds 80% and will be at the expense of the borrower. Base rate is Prime Rate with a floor of 4.00% APR and ceiling of 18% APR. Other rates apply for LTV exceeding 80% and credit scores lower than 705. Line of credit rate is variable and may change monthly. Minimum payment is 1.50% of the principal balance or $100.00, whichever is greater. For tax deductibility qualifications, visit IRS website or ask your tax advisor for more details.