September Financial Fitness Challenge?Get Out Ahead of Your ...
September Financial Fitness Challenge?Get Out Ahead of Your HELOC
If you have a home equity line of credit, you have a flexible tool that can help you take advantage of financial opportunities, borrow at a low (albeit typically variable) interest rate for major projects and bills, and even serve as part of your financial cushion?as long as you manage it prudently.
You might have heard a home equity line of credit (HELOC) compared with a credit card. You draw upon the loan amount?line of credit?and replenish the line as you repay it. That makes it ideal for large, recurring bills like college tuition or for an ongoing remodeling project.
You make the initial loan against the equity in your house. A HELOC might have a 25-year term, typically with a draw period of, say, five to 10 years, and a repayment period of 10 to 20 years. In some cases, the entire loan becomes due at the end of the draw period in a balloon payment.
You can set up a HELOC and leave it untouched for years?it's nice to have it available "just in case." When and if you draw against the credit line, you often have the option to make interest-only payments during the draw phase. That can keep payments low, an attractive feature when you're nibbling away at large expenses.
Some analysts worry that interest-only payments can lull borrowers into a credit crunch once the full loan comes due, or if interest rates spike on a variable rate loan.
The Federal Reserve Board website explains the features of a HELOC and how to shop for one.
Control the spigot
A HELOC provides wonderful flexibility. You decide when and how much to draw and to repay. Having one can give you peace of mind by backing up your savings while you're building your emergency fund, that essential financial flexibility tool.
If you use your HELOC to buy a car, plan to repay the line of credit just as you would a conventional car loan, even if your lender only requires interest payments. That way you'll never be faced with a loan balance that's more than you counted on, and you'll also consistently replenish the line of credit. That keeps it "topped off" so you can draw upon it in the future if you need to.
More than half of all HELOCs are set to enter the fully amortized payback period in the next year or so.
You'll still retain your payment flexibility if your cash flow slows for some reason. If you need to, for a time, you can drop down to interest-only payments until your finances stabilize. Just don't plan to make this a permanent feature of your HELOC.
You can use online calculators to figure a payment in line with a traditional car loan or closed-end home equity loan. For example, if you borrow $30,000 via a HELOC to buy a car, plan to repay it within four to six years.
Prevent HELOC headaches
In the past few years, some lenders froze borrowers' HELOCs or reduced their limits because of the troubled economy. Borrowers whose home values had dropped?and that's a lot of us?still were liable for the loans but lost the ability to draw upon them. And, if property value had deteriorated, a borrower couldn't get out of the bind by refinancing at currently low rates.
Some financial analysts are concerned HELOCs as a category could be the next financial bubble to burst. These observers point out that more than half of all HELOCs are set to enter the fully amortized payback period in the next year or so. That would be a rude shock to many borrowers who've drifted along making interest-only payments. The same is true if your loan demands a balloon payment at the end of the draw period.
The Federal Reserve website advises, "You must be prepared to make this balloon payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means."
A HELOC is ideal for large, recurring bills like college tuition or an ongoing remodeling project.
If you have concerns about your HELOC or your ability to manage it, talk to a loan officer at your credit union even if that isn't where you got your line of credit. A credit union lender can review your options and advise you about the path forward.
Financial Fitness Challenge
Your credit union money mentors bring you this website and other tools to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter every month. Remember to register for the Financial Fitness Challenge.
ST
Susan Tiffany, CCUFC
askem@cuna.coop


? Home & Family Finance? Resource Center
? Copyright ? 1997-2012 - Credit Union National Association Inc.
Source: http://hffo.cuna.org/11270/article/3611/html
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