6 HELOC Loan Myths, Debunked

A home equity line of credit, also called a term loan, a home equity line, or HELOC, is an unusual type of loan compared to the ones you may be used to. While most loans are for a fixed dollar amount, a HELOC loan is for a maximum amount — as in, you can withdraw up to a certain amount, depending on how much you need. You borrow this money against the equity of your house.

For the duration of the loan, you can draw this money by using a check or debit card, just as you might draw money out of your checking account. At the end, you pay it back, plus interest.

Because a HELOC loan is unique, and not everyone takes one out, there are a number of misconceptions about them and how they work. Here are six common HELOC myths, along with the truth about these loans.

Myth #1: You can only get a HELOC loan for a second mortgage.
Traditionally, HELOC loans were generally given to homeowners who took out a second mortgage on their house, to refinance their original mortgage. However, an increasing number of HELOC loans are given as the first mortgage you take out on a home.

But be aware that this can be very risky. A HELOC loan offers you no protection against changing interest rates. If the interest rate changes considerably, you may be saddled with a responsibility to pay back a far larger sum of money than you anticipated.

Myth #2: HELOC loans are only good for home improvement projects.
To be sure, this is the most common use of a HELOC loan. To many people, it makes a lot of sense to borrow money against the value of your home, to improve the value of your home.

But this isn’t the only use for a HELOC loan. You can technically take out a HELOC loan for any reason, any time you need any money. Just be ready to pay it back.

Myth #3: Once you get a HELOC loan, the amount of money you can take out through your HELOC loan can’t change.
Many people assume that once they receive a HELOC loan, the amount of money available to them through the loan will never change. Unfortunately, this isn’t true.

The amount of money you can get through a HELOC loan is taken out of your home’s equity. If your home’s value decreases, you may see a decrease in the amount of money you can take out through your HELOC loan. Likewise, if your credit score takes a severe hit, you may see your lender take action by reducing the amount of money available to you through your HELOC loan.

Myth #4: A HELOC loan is basically a reserve of cash.
On the surface, this is true: you can withdraw money from the money allotted to you in your HELOC loan by following the same procedures you might follow to withdraw money from a checking account or by spending money on your credit card. However, there are some key differences.

For instance, the money available to you through your HELOC loan is only available to you for a set amount of time. If you haven’t spent it during that time, the amount of money is no longer available (which is not a bad thing — you won’t have to pay that money off). If your conditions change, your bank can change the terms of your HELOC loan or change the amount of money available to you. Your financial institution can even freeze your HELOC loan account in extreme cases.

You must also pay interest on the money you withdraw. You’ll likely also be given a series of terms and conditions you must abide by with regards to your HELOC loan. None of these apply when you’re spending your own money!

Myth #5: You can pull out all of the equity in your home, using a HELOC loan.
Most financial institutions won’t allow you to do this (it’s called “100-percent financing”). Most lenders impose a cap on the amount of money you can take out, which is typically between 70 percent and 85 percent of your home’s value.

Though this may seem irritating, it’s actually a good thing. Spending all your home’s equity would be very financially risky. The more you take out, the more you have to pay back — with interest.

Myth #6: It’s a good idea to take out a HELOC loan because you never know if you’ll need the money.
HELOC loans aren’t free. Like many loans, there are closing costs. These are usually less than you’d pay to close a normal mortgage, but they aren’t cheap, either.

Many HELOC loans require a minimum draw when you first take out the loan. There’s often an annual fee you have to pay as well as a cancellation fee due if you cancel the loan. None of these fees are very high, but your HELOC loan definitely isn’t free money — and that’s leaving aside the repayment and interest rates you’ll have to take care of later.

HELOC loans aren’t for everyone, but they’re a valuable way of getting a line of credit if you need one. If you still have questions about HELOC loans, reach out to us and we’ll help you out. If you’re ready to get started, apply for a HELOC loan here.

5 Auto Loan Financial Considerations You May Not Know

If you’re buying a vehicle for the first time, you may be unfamiliar with a lot of the terminology and processes involved in taking out an auto loan. Because this loan is going to be a significant part of your financial future, this process may seem very intimidating!

Don’t walk in blind. The following five factors shape the process of taking out your auto loan — as well as your financial future.

1. Check Your Credit
Your credit is basically a record of your financial history over time. Good credit means you’ve paid back everything you’ve owed in a timely fashion. Bad credit means you’ve been delinquent on payments. No credit means you’re a wildcard: there isn’t necessarily enough data about your borrowing history to make a judgment about the kind of borrower you are.

You’re allowed one free in-depth look at your credit history each year. It’s a good idea to have a look at it before you take out a major loan, like an auto loan. You can see what, if anything, you haven’t paid back, so you can start taking steps to shore this up. Keep in mind that the process of raising your credit score can take months or years, and this may be difficult to do if you need a loan right now. However, even if you take a few steps to shore up your credit, the lender will see that when they run the numbers and may be more accommodating as a result.

You’ll qualify for different interest rates depending on your credit: better credit will mean a lower interest rate, which means you pay less money on your loan overall. This is because if you have good credit, your lender trusts you to pay back the money you borrow in a timely fashion.

2. Shop for a Good Interest Rate
When you borrow money (for a car, a home or anything else), you don’t just pay back the original money. You pay back an amount of money called interest, too, as a way of making it worth the lender’s time to give you that money. The exact amount of interest you pay is described as a percentage of the sum that’s added over time, and this is called the interest rate.

Lenders will run the numbers, consider your credit and the loan you’re requesting, and give you an interest rate that matches your credit and the amount of money you’re borrowing.

However, different lenders will offer you different interest rates, and you aren’t tied down to any particular lender (until you sign for your loan). Don’t be afraid to shop around and look for a good interest rate. Remember that dealers and different financial institutions will both offer you loans, and you can choose between these.

3. Think About the Length of Your Loan
When you take out a loan, you agree to pay it back within a specific length of time. Your lender may give you several options for loan length.
In general, you want a shorter loan rather than a longer one. You’ll usually pay more in your monthly payments (see below), but because interest accrues over time, you’ll pay less on your loan overall.

4. Take a Look at Your Monthly Payments
When you agree to take out a loan, you’ll agree to make a certain monthly payment every month. Many lenders offer low monthly payments on loans to rope borrowers in.

To be sure, you definitely don’t want to have to stretch considerably to make your monthly loan payments. Missing a payment can have serious consequences for your credit, and if you’re delinquent the lender may even repossess your car.

However, a very low monthly payment can have its own consequences. If your monthly payments are low, then you’re paying back your loan slowly (see point three above). You’ll pay a large amount of interest on your loan — far more than you would if you paid back your loan quickly.

This means you shouldn’t necessarily go for the lowest monthly payment. As a general rule of thumb, you want to pay about 20 percent of your income toward your loans. If you do go with a very low monthly payment, consider paying off a little extra each month — preferably as much as you can afford. This will greatly reduce the amount you pay back over time.

5. Look at Refinancing
If you have bad credit, have been pushed into a loan that doesn’t make good financial sense, or have already signed onto a loan, don’t panic. You have a very good option available to you called refinancing.

When you refinance a loan, the lender takes a fresh look at both the economy and your financial situation, including your credit. From there, they give you an adjusted interest rate on your loan. If you have multiple loans with different interest rates, you may also be able to take a special kind of refinancing called a consolidation. This simplifies the process of paying your loan back and can often reduce your interest rate.

Borrowing money creates a major financial obligation, but it doesn’t have to be scary. By keeping these tips in mind, you’ll be ahead of the game when it comes to taking out money for your new car.

Click here to learn more about KEMBA’s vehicle loan offerings.