The benefits property owners enjoy by securing a Home Equity Line of Credit are undeniable. Also called a “HELOC,” homeowners use their equity as collateral when applying for one of the most flexible low-interest loan products available.
Qualified borrowers typically find HELOC rates the most advantageous for home improvements, large ticket item emergencies, long-term medical expenses, or paying for a wedding or dream family vacation that provides a lifetime of fond memories. Unlike many other loan products, a HELOC allows borrowers to withdraw funds over a set period of time (typically a ten-year draw period) and use the money at their discretion. When the draw period ends, you enter the repayment period where you can no longer borrow from the available line of funds (typically a twenty-year period). You would begin to repay the balance in monthly installments.
Although a Home Equity Line of Credit is traditionally more cost-effective than unsecured loan options, borrowers sometimes become overly fixated on securing the lowest HELOC rates and forget the other important considerations.
HELOC Rates Are Very Important, But Not Everything
One of the differences between a HELOC and common personal or home equity loans involves variable versus fixed rates. HELOC rates are usually variable and fluctuate in concert with interest rate decisions made by the Federal Reserve. By contrast, home equity and unsecured personal loan products usually come with fixed-rate options.
While HELOC interest rates are an important facet of this loan solution, Home Equity Lines of Credit are unique and there are a lot of things to keep in mind when considering this option. When it comes time to apply for a HELOC, you have to consider more than just HELOC rates. You must consider the additional costs related to the application and loan process as well as what happens after you are approved.
Besides HELOC Rates, Here Are Some Things To Consider
It may be in a borrower’s best interest to take a deep dive into wide-reaching aspects of a Home Equity Line of Credit that looks beyond interest rates. It’s not uncommon for big banks to dazzle homeowners with seemingly excellent rates. After initialing boxes and signing off on paperwork with mind-numbing legalese, everyday people discover the out-of-pocket expense outweighed the HELOC rates they believed offered the best deal. If you plan to take out a HELOC, these are things to consider in addition to low-interest HELOC rates.
Consider the HELOC Loan Upfront Costs
Homeowners who focus on the best HELOC rates may look past other costs that make a large lender’s product more expensive than a local credit union’s. Big banks have shareholders who require dividend checks and want to see stock values rise. Driven by profits, banks integrate fees into wide-reaching accounts, lines of credit, mortgages, and personal loans. These are items to compare when applying for a HELOC.
- Application Fee: Also called an “origination” fee, it’s not unusual for lenders to charge a nominal amount to cover processing an application. However, some large lending institutions ramp this fee up and turn a profit on your application. Allegiance Credit Union’s Origination Fee is $250 ( due at closing.)
- Notary Fee: This sometimes hidden cost will often be waived by local credit unions who have a certified notary public on-site. By contrast, others up-charge customers even though someone on staff can stamp the paperwork for the cost of the ink. Allegiance Credit Union doesn’t charge a Notary Fee.
- Title Search Cost: It’s essential for lenders to ensure the HELOC applicant owns the property and possesses adequate equity to secure the loan. Unpaid taxes, liens, and other issues can disqualify people from HELOC approval. Be vigilant about not getting overcharged for this necessary part of the process. Allegiance Credit Union’s Title Report Fee is $125 or $75 depending on the county. There is an additional $40 Recording Fee.
- Appraisal Fee: Real estate appraisal costs have been rising the last couple of years. Although they are necessary to determine equity, it may be prudent to verify you are only paying for their service and not lining a banker’s pockets. Allegiance Credit Union’s Standard Appraisal Fee is $665 for a full appraisal or $235 for a marketability report.
- Attorney Fees: A HELOC requires a professional to review the documents for accuracy. These fees are sometimes hidden in the closing costs. Check the line-item breakdown and make sure you are not excessively charged.
- Loan Processing Fee: A HELOC requires lenders to gather documentation and process the loan. Allegiance Credit Union’s Loan Processing Fee is $300 (due at closing).
- Flood Zone Determination Fee: Allegiance Credit Union’s Flood Zone Determination Fee is $11 (due at closing).
It’s crucial to look deeper than HELOC rates when borrowing.
Be Aware of the Introductory and Promotional Offers Impacting Your HELOC Rates
When homeowners come across HELOC rates that seem too good to be true, more research must be done. Among the more attractive offers are those with zero to less than 1 percent APR (Annual Percentage Rate) in the first six months. These types of promotions are similar to the introductory specials offered by credit card companies. Once the introductory timeframe ends, the rate will most likely increase. Be sure to find out what rate you can expect once the promotional time period ends.
When viewing rates, always double-check the requirements you must follow to receive that rate. Some rates are dependent on if automatic loan payments are set up inside online banking, if you have direct deposit, or if you qualify for a rewards program. Be sure to perform due diligence and read all the fine print when it comes to finding the best HELOC for your needs.
Understand How HELOC Rates are Affected by the Prime Rate
People accustomed to fixed-rate mortgages and personal loans need to be made aware of the different rate structure a Home Equity Line of Credit follows. The basic premise is that borrowers usually pay monthly interest at a variable rate that is determined in part by the prime rate set by the Federal Reserve, or “The Fed,” in addition to what the financial institution deems appropriate.
When prime rates are low — as they have been for many years — borrowers pay less. But should The Fed decide to increase the prime rate, people with variable-rate loan products see the monthly payment tick up. There may be opportunities with local credit unions to transition variable HELOC rates over to fixed options once the drawdown period ends to make borrowers feel more comfortable.
Review the HELOC’s Draw Period
One of the distinguishing factors between a Home Equity Line of Credit and a Home Equity Loan revolves around how much money homeowners pay back. With a Home Equity Loan, borrowers receive a lump sum and promptly begin monthly payments. HELOCs, by contrast, offer flexible withdrawals that allow borrowers to only pay what they use. Allegiance Credit Union allows members to draw on their line of credit for ten years.
Some institutions now set withdrawal minimums so be sure to keep that in mind when comparing which HELOC fits your needs.
Check Out the HELOC’s Repayment Period
After the draw period ends, the repayment period begins. The principal payment and interest will be due monthly, and the total amount due will be dependent on how much you spent during your draw period. Keep in mind that the length of your repayment period can increase or decrease your total amount due significantly. Be sure to find out if there is a prepayment penalty for paying off your balance in full before the repayment term expires.
Consider Any Closing Costs Associated with Your HELOC Loan
Qualified borrowers would be well-served to thoroughly review the closing documents and charges. The excitement surrounding using a HELOC, and lengthy legal documents, sometimes leads people to sign too quickly. Read the closing documents and vet the list of closing costs thoroughly. Don’t be afraid to step away from a deal that doesn’t live up to its billing.
Keep In Mind Loan Processing Times Will Vary by Lender
Loan and line of credit applications are more straightforward to process than ever before. Much of the information to complete and approve a HELOC application can be accessed online. The only real-time considerations involve having an appraiser see and possibly walk through the house. Keep in mind that local lenders tend to enjoy a network of professionals who can expedite the process. Allegiance Credit Union can close on a HELOC in as little as two weeks.
When Searching for the Best HELOC Rates and Offer, Start Local
It’s not unusual for people searching for the best HELOC rates to start online. Big banks and less-than-credible lenders are keenly aware of this tendency. That’s largely why community members too often fall prey to click-bait promotions.
It’s typically in a homeowner’s best interest to start by meeting with a professional at a local credit union. Credit unions are not-for-profit organizations that help you find the best solution for your needs. Unlike banks, they do not gain anything by placing a member into the wrong product. With no shareholders to pay, you can rest assured that credit union experts have your best interest at heart and should be your first stop when it comes to shopping and applying for the best HELOC available.
