Wednesday, May 17, 2017

Choosing an Equity Loan in a Rising Rates Environment

Q: I’ve heard that interest rates will climb soon. If that is true, how does it impact home equity lines of credit and a typical home equity loan? And what are the differences anyway?

A: It’s true that financial experts predict an interest rate hike (or multiple hikes) in 2017. There are some key differences between a home equity line of credit (HELOC) and fixed home equity loans. Here are some of the things you’ll want to know:


HELOCs 

How they work:  
A HELOC is a revolving credit line that allows you to borrow money as needed, with your home serving as collateral for the loan. You can spend the funds however you’d choose, though some lenders have restrictions on the amounts and ways you can borrow.

1.) Pros
HELOCs allow for financial flexibility. You can borrow money as needed over an amount of time known as the “draw period.” This is especially beneficial if you don’t know exactly when or how much money you’ll need. Repayment options vary, but are also usually very flexible. When the draw period ends, some lenders will allow you to renew the credit line, and others might allow you to make payments over another set period of time.

Monthly payments also vary. Some only require monthly interest payments and then collect the entire principal at the end of the draw period. Others base the payment on a portion of the amount owed plus interest. This is an important question to ask as you research your options.

2.) Cons 
HELOCs have variable interest rates – the interest you’re paying on the loan fluctuates over the loan’s term. Taking out a HELOC in an environment of rising interest rates means your rates are likely to increase over the life of the loan.

HELOCs that require repayment of principal only at the end of the term can also prove to be difficult for borrowers. If you can’t pay the large amount, you may be forced to refinance with another lender, possibly at an unfavorable interest rate.


Home Equity Loans 

How they work: 
A fixed rate closed end home equity loan, also secured by your home’s equity, allows you to borrow a fixed amount in one lump sum. Most home equity loans have a fixed term and a fixed monthly payment.

1.) Pros 
Home equity loans have fixed interest rates – the borrower knows exactly what their monthly payment will be for the life of the loan. In an environment of rising rates, this is especially beneficial; the loan won’t be subject to increasing rates. Every monthly payment on your loan is made up of both principal and interest. You will pay back the entire loan, in manageable amounts, until the loan term is over.

2.) Cons 
Receiving all the funds at once may be problematic if you find you someday need more than the amount borrowed. Also, the monthly payments may be higher.

Both options may have fees or prepayment penalties attached, so be sure to ask questions about these when doing your research. Ready to start? Our knowledgeable representatives can help you decide if a home equity loan or HELOC is right for you. Give us a call at (877) 937-2328 or visit www.cfcu.org/HELOC for more info!

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