When you need access to cash, you might wonder if tapping into your home equity is the right move. After all, it can provide a significant amount of money for various goals and purposes. However, understanding how home equity financing works is essential, especially since your home is used as collateral. Let’s explore the benefits and considerations so you can make an informed decision.
Home Equity Lines of Credit (HELOCs)1,2
Home Equity Lines of Credit or HELOCs, are the most popular form of home equity financing and are a type of second mortgage. As an open line of credit, HELOCs provide ongoing access to cash based on the available equity in your home. Similar to a credit card only with typically lower variable rates, a HELOC provides you with an open line of credit, where funds become available to you again as you pay down the balance.
Home Equity Loans
In contrast, a Home Equity Loan provides a lump sum of cash upfront at the time of loan closing. This type of loan offers a fixed rate and predictable monthly payments that begin shortly after you close on the loan.
Benefits of HELOCs
A HELOC offers flexibility, allowing you to tap into your home's equity as needed. Unlike a Home Equity Loan, which provides a lump sum with fixed repayment terms, a HELOC functions more like a credit card. You can borrow, repay and borrow again up to your limit during the draw period. This makes HELOCs ideal for expenses like home renovations, major purchases or consolidating high-interest debt. They can also serve as a convenient emergency fund due to their flexible nature.
Additionally, the interest you pay on your HELOC might be tax-deductible if the line of credit is used for specific purposes and meets certain requirements. A tax advisor can give you full details as to what is and is not deductible relative to a HELOC.
Because HELOCs are secured by your home, they usually offer some of the lowest financing rates available. For example, at APCU/Center Parc, you can obtain a HELOC with an annual percentage rate with rates as low as the Prime Rate plus 1%. The affordability compared to credit cards is one of the most appealing aspects of Home Equity Lines of Credit.
Annual Percentage Rates
An Annual Percentage Rate – or APR – represents the total cost of financing. This means that if your financing solution has associated fees, the APR incorporates those expenses as well as the interest itself.
Weighing the Risks and Benefits
Because a HELOC uses your home as collateral to provide lower interest rates, it's crucial to consider whether this option is right for you. If you’re concerned about making the payments, a HELOC might not be the best choice. However, an experienced home equity lender will be able to work with you in reviewing your financial situation and helping you determine whether a HELOC is a good option for you.
On the other hand, the low rates that come with HELOCs can help those who are struggling with forms of financing that come with higher APRs. For this reason, getting a Home Equity Line of Credit can be an effective strategy for dealing with an economy associated with rising costs and inflation.
Choosing a HELOC Lender
Once you've decided that a Home Equity Line of Credit is right for you, it's important to choose a local HELOC lender who is knowledgeable and committed to working with you individually. At APCU/Center Parc, we’re here to ensure you have the right home equity financing for your unique needs and goals. For personal assistance, give us a call at (800) 849-8431.
1. Credit Union Membership eligibility and credit qualifications apply. APR=Annual Percentage Rate. The prime rate is the highest prime rate published in the Money Rates Table of the Wall Street Journal on the last business day of each month. Prime is a variable rate; as the prime rate increases or decreases so will the APR, which affects your monthly payment. The payment could then change during the next billing cycle. The current prime rate is 8.50%, current as of September 1, 2024 - with a maximum APR of 18.00%. The rate may vary depending on each individual's credit history and underwriting factors. Not all applicants will qualify, nor will all applicants qualify for the lowest rate. Credit is contingent on the equity in your home. The specific terms, including the interest rate, will be disclosed in the loan agreement. Subject to applicable laws, regulations, and lending guidelines. Any modifications to these laws and regulations may impact the terms and conditions of the HELOC. We reserve the right to modify or terminate the HELOC at any time, subject to applicable laws and regulations. We will provide notice to you in accordance with legal requirements. A home equity line of credit is secured by a first or second mortgage lien on your home, which must be one-to-four family residential real estate. This type of credit is not available for investment or rental property. The minimum line of credit amount is $20,000 up to a maximum of $250,000. Maximum loan to value is 100%. 25-year term, consisting of a 10-year draw period followed by a 15-year repayment period. If the Home Equity Line of Credit is closed within 36 months, member will be required to pay all loan fees and closing costs. All loan fees and closing costs for opening the plan begin at $3,000 and go up. Flood and/or property hazard insurance will be required. Other restrictions may apply. Interest-Only Option – will require a monthly minimum payment of the interest your loan has accrued. However, your principle balance will remain the same until you make additional payments for principle. Members who choose to proceed with an Interest-Only Home Equity Line of Credit may experience significant monthly payment increases when the line of credit enters into the repayment phase, which could result in a balloon payment.
2. HELOCs not available in the State of Texas.