Choosing a Home Equity Loan should be easy. You’ve got equity in your home. Your credit is good. You can afford the payment. What’s the big deal? The truth is, all Home Equity Loans are not the same, and some lenders advertise rates or terms that very few borrowers qualify for, only to switch you into higher rates or less favorable terms somewhere during the process.
Why More People are Choosing Metro Credit Union for Home Equity Loans!
Understanding the critical features of different Home Equity Loans can save you time, money, and frustration, so let’s learn the basics.
Understanding Home Equity Loans
Most homeowners have some amount of equity in their homes. Your equity is the difference between your home’s value and the balance you owe on your mortgage (ex. Home Value $300,000 – Mortgage Balance $200,000 = Equity $100,000). The equity in most homes increases over time as the home’s value increases while the mortgage balance gets paid down. Many times, borrowing against this equity (as opposed to getting an unsecured or other types of the loan) allows for larger loans, lower payments, better interest rates, or all three. Knowing which factor (amount, payment, or rate) is most important to you can guide you to the best option.
Home Equity Loans have traditionally come in two types: Home Equity Lines of Credit (HELOCs) or Fixed-rate/Fixed-term Home Equity Loans.
Home Equity Lines of Credit (HELOCs)
The biggest advantages of HELOCs are that you can borrow against the Line of Credit, repay it, and borrow again, multiple times during the term of the loan. You only pay interest on the amount of the credit line you use, and the payments are usually lower. The biggest disadvantages to HELOCs are that the interest rate is variable (so it can go up), and many times borrowers have a balloon payment due at the end of the term.
Fixed-rate/Fixed-term Home Equity Loans
Fixed-rate/Fixed-term Home Equity Loans offer a known interest rate and payment that pays the balance down to zero during the term of the loan. However, you only get to borrow one time at the beginning of the loan, so if your plans change you’ll have to refinance and get an entirely new loan. And, the monthly payment is usually higher.
Understanding Loan-to-Value (LTV)
Lenders have a maximum Loan-to-Value (LTV) they will allow for your Home Equity Loan. That means you cannot use all the equity in your home. The problem is that too conservative a lender may not let you use enough of your equity for your needs. Some lenders have a maximum LTV of 80% combining your primary mortgage and your new Home Equity Loan. In the example above, the lender multiplies .80 x $300,000 Home Value = $240,000. So, with this lender, you cannot use $60,000 of your $100,000 in Equity. If you have a $70,000 remodeling project, you cannot borrow enough from this lender regardless of the terms or rates or type of loan you get. However, if you find a lender with a 90% maximum LTV, you can borrow up to $70,000 for your project (.90 x $300,000 = $270,000).
As maximum LTVs go up, so does the risk to the lender. So, sometimes higher LTVs come with higher interest rates, but that isn’t always the case; some lenders just have better deals. Another problem you can run into is when a lender advertises a great rate, but when you get there you find out they have a maximum Loan-to-Value of 80%, and you can only qualify for that special rate if your primary mortgage is paid completely off. Instead of going back to the drawing board, many borrowers just sign for a higher rate.
The HELOC sounds great, but I’m worried rates will go up?
There is no question that HELOCs offer borrowers the most flexibility. Once the line-of-credit is established, you can borrow as much or as little as you like. You don’t have to know your exact plans when you get the loan. And, you can use the HELOC for one purpose, like consolidating high-interest credit cards, pay that back, then use the HELOC again to remodel the kitchen. However, you’re afraid these historically low rates won’t last forever and you don’t like variable rate loans. Metro Credit Union has a new Home Equity Loan product for you.
Metro CU’s Flex 90 Home Equity Loan
Metro Credit Union has a product that gives borrowers the best of both worlds. You get the line-of-credit flexibility of a HELOC, but four times during the life of the loan, you can lock in all or a portion of the balance at a fixed-rate and fixed-term. Here’s an example of how it works.
Using our same example, let’s say you get Metro’s Flex 90 Home Equity Line of Credit (HELOC). The “90” stands for a 90% LTV. This means you have a $70,000 line-of-credit (.90 x $300,000 = $270,000 - $200,000 = $70,000). During that first year, you make periodic draws on the line-of-credit to pay for $50,000 for a new kitchen. But, at the end of the first year, you’re reading that interest rates are going up. You had planned to pay off the $50,000 over five years, and you’re worried what rates will be by then. With Metro’s Flex 90 HELOC, you can lock in the entire balance at a fixed rate for 60 months. You still would have $20,000 available on your line-of-credit, and that amount would go up each time you make a payment on the $50,000 you locked in with a fixed-rate and term. You can lock all or a portion of your balance four different times during the life of the loan. You have the flexibility of a HELOC without the long-term risk of rising interest rates.
What if 90% LTV isn’t enough?
What if in addition to $50,000 for your kitchen, you want to spend $20,000 on your bathroom and consolidate $30,000 in high-interest credit cards? Isn’t there a way to use all of your equity? There is at Metro Credit Union. Metro has a Flex 100 HELOC that allows you to use 100% of the equity in your home (100% x $300,000 = $300,000 - $200,000 = $100,000). With the Flex 100 Home Equity Loan, not only can you use all of your equity to tackle all three goals, but you can lock the balance for each project with a fixed-rate and term if you’re worried rates will go up. Still not enough? Metro has a Flex 110 HELOC that lets you borrow more than the equity in your home. In the case of your example, it would be $130,000 (110% x $300,000 = $330,000 - $200,000 = $130,000). The higher LTVs of the Flex 100 and Flex 110 have higher rates than the Flex 90, but many times Metro’s rates for higher LTVs may be lower than the competition’s rates for an 80% LTV Home Equity Line.
Save time, money and frustration – Call Metro Credit Union first
Why go through the hassle of calling around and hoping different lenders are telling you everything? Call Metro Credit Union and speak to a Personal Banker about the right Home Equity Loan option for you. Get the LTV option that meets your needs with some of the best rates and terms available. And best of all, at Metro Credit Union we work for you, so you don’t have to be a lending expert.
Metro Credit Union Mortgage is the home lending side of Metro Credit Union. Buying your first home is a big step, but it doesn't have to be a scary one. The more you know about the home buying process, the more confident you'll feel about making these important decisions that will shape your future.
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