Mother Nature offered a brief glimpse of milder weather this past week. And while I am not so foolish as to think that we are on the brink of real warm weather, the heat wave (skyrocketed in to the low 50’s) we enjoyed prompted me to begin thinking of Spring projects around the house. I am not alone in this thinking. I have received numerous calls lately from people looking for advice on how to finance their home improvement projects for the coming Spring and Summer. Without a doubt the most versatile mortgage loan product available is the home equity line of credit (HELOC in industry jargon). These products are so useful to the borrower because within the first ten years of the loan, known as the draw period, there is no limit to the number of times the funds can be accessed. As the name suggests, homeowners need to have accumulated equity in their house. Assuming that is the case and depending upon credit profile, up to ninety percent of the value of the home can be borrowed. The best HELOCS available have no closing costs and are offered at the prime interest rate. The prime rate is the index to which credit cards, home equity loans, auto loans, and personal loans are tied. It should be noted that this rate is not fixed. However, it is a slow moving index – it has remained at 4% for almost a year. Previously it was at 4.25%. There is no re-qualification process with each draw – the money available to be used at the borrower’s discretion. Conveniently, interest only payments are available during the ten year draw period. After ten years, the draw period will expire and the balance remaining will be amortized on a twenty year term, the interest rate tied to the one year treasure bill. Aside from home improvement projects, this type of loan product is a smart option for those looking to consolidate debt, as the interest on these loans are typically much lower than credit cards. Additionally, the interest paid on home equity lines of credit is tax deductible.
Any
downsides? Of course there are no free lunches. As with any type
of revolving credit, HELOCS should not be looked at as ATM’s.
Unfortunately, many fiscally irresponsible homeowners fail to understand
the ramifications of mortgaging themselves to the limit. As with
any powerful tool, HELOCS should be used with caution and for good
reasons. Ideally, a borrower would want to pay this type of loan
down before the end of the initial ten year draw period. |
