SafeAmerica Credit Union

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• By Kevin Alvarez

What Is A Home Equity Line Of Credit?

A home equity loan or line of credit (HELOC) allows you to borrow money using your home’s equity as collateral. This is like a second mortgage that turns equity into cash.

To begin, let’s make sure we understand these two important terms:

Collateral is something that you pledge will repay a debt. If you don’t repay the debt, the lender can take your collateral and sell it to get its money back. With a home equity loan or line of credit, you pledge your home as collateral. You can lose the home and be forced to move out if you don’t repay what you’ve borrowed.

Equity is the difference between how much the home is worth and how much you still owe on the house.

If your Home Value Goes Up

Let’s say you buy a house for $150,000. You make a down payment of $20,000 and borrow $130,000. The day you buy the house, your equity is the same as the down payment: $20,000.

Fast-forward five years. You have been making your monthly payments faithfully, so you now owe $117,000. During the same time, the value of the house has increased. Now it is worth $200,000. Your equity is the difference between them: $83,000

If Your Home Value Goes Down

Let’s say you buy a house for $150,000. You make a down payment of $20,000 and borrow $130,000. In five years your balance is $117,000.

But home prices fell. Now your home is worth $105,000. But you still owe $117,000. Because the value of your home is less than the amount you owe, you have negative equity and are not eligible for a home equity loan.

Types of Home Equity Debt

There is a difference between home equity loans and home equity lines of credit. Both are called second mortgages because they are backed by your property. Home equity loans and lines of credit are repaid in a shorter period than first mortgages. Mortgages are set up to be paid over 30 years. Equity loans and lines of credit often have a repayment period of 15 years. Sometimes it is as short as five and as long as 30 years.

A home equity loan is a lump sum that is paid off over a set amount of time. There is a fixed interest rate and the same payment amounts each month. Once you get the money, you cannot borrow further from the loan.

A home equity line of credit works like a credit card. It has a revolving balance. A HELOC allows you to borrow up to a set amount for the life of the loan. During that time, you can withdraw money as you need it. As you pay off the principal, you can use the credit again like a credit card. A HELOC gives you more options than a fixed-rate home equity loan.

Terms and Repayment

A line of credit often has an interest rate that changes over the life of the loan. Payments vary based on the interest rate. You can’t add new debt during the repayment period. You must repay the balance over the remaining life of the loan.

The draw period often is five or 10 years.  And the repayment period often is 10 or 15 years. But each lender can set its own draw and repayment periods. A customer’s check, credit card or electronic transfer accesses a line of credit. Lenders often have some requirements:

  • Take an initial advance.
  • Withdraw a minimum amount each time you dip into it.
  • Keep a minimum amount outstanding.

With either a home equity loan or a line of credit, you must repay the loan in full when you sell the home.

Information brought to you by our partner, GreenPath Financial Wellness

 

If you're looking for a home equity loan or line, SafeAmerica Credit Union can help.  We offer:

  • Low, variable APR
  • No annual fee / no points
  • Borrow up to 80% of your home's value
  • Much more!

Click below to learn more about our home equity options.

Learn more About Home Equity

• By Kevin Alvarez

What is a balance transfer?

A balance transfer is a financial resource that doesn't get as much recognition as it deserves. Let's shed some light on balance transfers and go over how you could take advantage of paying down debt with a lower interest rate and get you on track for your next financial goal.

What is a balance transfer?

It's moving high interest debt (usually credit card debt) amount from one account to another account that has a significantly lower interest rate.

How does a balance transfer work?

Let's use an example; you have a credit card balance of $1,200 at 24.99% APR from your favorite retailer and transfer that total debt amount to another financial institution with an interest rate of 10%.

Think of the financial position you would be in with an interest rate of 10% or even 0%. Instead of paying $299.88 in interest with your 24.99% APR account, you'd now pay $120 with your new 10% APR account or even $0 with a 0% APR.

Does a balance transfer hurt my credit?

As long as your credit account from the previous financial institution is kept open, your credit will improve.

Is there a fee to transfer a balance?

Many big banks charge a balance transfer fee between 3% and 5% of the amount that would be transferred. Let’s continue to use the $1,200 at 24.99% APR scenario for another example. When you transfer over to a financial institution with a lower rate but charges a balance transfer fee of 5% be prepared to pay the additional $60. As situations vary from person to person, the fee itself may be the deciding factor for transferring over a balance. Of course, be aware of all fees in order to make sure a balance transfer is truly beneficial to your current financial situation. Remember as a member of our credit union, you receive a lower or no balance transfer fee, one of the many differences between your local credit union and the big banks.

Should I close my old credit card after a balance transfer?

You definitely should not close any of your credit cards. Since balance transfers are linked to a credit card, you would be increasing your credit utilization amount, which would then improve your credit score. As long as you have no balance and are not charged an annual fee, it won't cost you to keep the account.

Does a balance transfer count as a payment?

A balance transfer does not count as a form of payment. You transferred a balance in order to make lower payments.

What is a typical minimum payment on a balance transfer?

Minimum payments vary with financial institutions and its always good practice to clarify with your financial institution.

Do balance transfers earn reward points?

This would also vary between financial institutions. For the most part, financial institutions would not offer rewards points for balance transfers. This would be something to verify with the financial institution when applying for credit cards with the balance transfer feature.

How long does a balance transfer take?

Industry average is between 14 and 21 days to complete the process of paying off your previous lender.

Is a balance transfer the right financial resource for me?

A balance transfer can be very beneficial for those who have manageable debt with high interest rates. The objective is to take advantage of any promotional 0% periods to pay down as much debt as possible which in turn, is going towards paying down the principle rather than any interest.

SafeAmerica Credit Union can help. If you're interested in transferring a balance you have at another financial institution, we're currently offering 0% APR on purchase and balance transfers through September 30, 2021 when you open a new credit card through March 31, 2021.

How SafeAmerica Credit Union's balance transfers work:

  • Balance transfers often take 2-3 days compared to industry standard of 14 to 21 days.
  • We're currently offering 0% interest through September 30, 2021 on balance transfers done from January 1, 2021 to March 31, 2021
  • We charge no balance transfer fees on our balance transfers.

To learn more on how you can take advantage of balance transfers and start paying less interest on your debt, click below.

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