Unless you’ve bought or sold your home recently or know someone in your area who has, you may be pleasantly surprised by its current market value. In fact, selling prices have been on a multiyear rise.
While the added appreciation in home equity is nice, it also means you may have additional borrowing power. That’s something you may want to gain access to through a home equity line of credit. (HELOC).
How a HELOC Works
A HELOC is a tool that allows homeowners to borrow a percentage (typically 70%- 90%) of the difference between the amount they have outstanding on their mortgage—if they have one—and the current market value of their home. As a revolving line of credit, it bears resemblance to a credit card but with a much higher borrowing limit.
Unlike most credit cards, the interest rate you are charged on a HELOC is lower since the line is secured by a home. For most homeowners, the interest is typically tax deductible, making it even more cost effective. However, you will want to verify with your own tax professional to make sure you qualify to take this deduction.
The rate on a HELOC will vary with the general level of interest rates. At Old Second, we use the U.S. Prime Rate as our benchmark and then add a fixed-margin rate to that, based on your financial information. We make the process easy and walk you through every step.
Although HELOCs are offered on a variable-rate basis, our clients can always switch to a fixed-rate option if they are concerned interest rates will rise. Instead of having the flexibility of paying only interest each month, payments under the fixed-rate option will include a specific amount of principal as well.
While different lenders offer different structures, Old Second’s HELOC provides 10 years of access. You can borrow and repay as often as you want during that time. If the line isn’t renewed after 10 years, it converts into a loan with a 20-year repayment plan, behaving like a second mortgage.
Qualifying for a HELOC is like qualifying for a mortgage, though a little less intense. There are no upfront fees and we charge a $50 annual fee (with the first year waived) as long as it remains open along with a pre-payment fee when applicable.
When to HELOC
As a personal cash management tool, you can access your line pretty much whenever you want by writing a check or calling to arrange a transfer. We see our clients using them to:
- Spend before receiving, such as taking a vacation before receiving a year-end bonus.
- Fund remodeling and home repair expenses.
- Repay higher interest loans or credit card balances.
- Cover large or unexpected expenses, from weddings and college tuition to replacing a car or paying medical bills.
- Make a down payment on a vacation property.
Because HELOCs are both flexible and reusable, many homeowners take them out before they have an actual need. That way, they have a ready source of funding whenever the need arises.
To talk about how you might benefit from adding a HELOC to your financial toolkit, give us a call at 1-877-866-0202 or visit any Old Second Bank branch. Let’s talk about what we can do to help you achieve your goals.