Two financial phenomena have taken place in the UK over the last decade. On the one hand, we have increasing become a nation of debtors, running up trillions of pounds in short-term debt. On the other hand, house value have increased exponentially during this period and many of us now have massive amounts of in-built equity value in our homes. It may seem natural, therefore, to use the proceeds of one to pay off the debts of the other. However, using a home equity line of credit (HELOC) may not be the best method of debt consolidation available to you.
What is a HELOC?
Essentially HELOC is exactly what it says it is. As a homeowner you have an asset – you home. Because housing prices in the UK have increased dramatically in the past decade, many of us have positive equity in our homes. To repay outstanding debt, you can free up some of this equity with a loan, against which you provide security – your home. You have now just completed a HELOC.
Why is this a good way to consolidate my UK credit card debt?
Many see HELOC as a good way to consolidate their UK credit card debt because, as a secured debt, the interest rate on the loan is much lower than the interest rate they’re currently paying on their existing outstanding unsecured credit card debt. In addition, the repayment terms of the consolidated debt may be more affordable, i.e. the monthly repayments may be lower.
Why is this a bad way to consolidate my UK credit card debt?
There are essentially two principal reasons why HELOC may be considered a bad way to consolidate your debt. On the one hand, and very importantly, if you elect to consolidate your debt using a HELOC, you need to be aware that you are literally gambling with your home. If you fail to make repayments under the line of credit provided to you, as a secured loan, you stand to lose your home. Consequently, this can be seen as an extremely risky way to pay off unsecured debt, against which a claim against your biggest asset – your home – would be far more remote.
The second reason why HELOC are seen as not being a particularly good way to consolidate credit card debt is because, unlike in the past, there are now other alternative methods that credit card debtors can use to try and consolidate and pay off their credit card debt. Examples of this may be the unsecured personal loan or even the 0% interest offered as a promotional incentive to transfer your credit card balance to another UK credit card provider. In short then, HELOC are seen as an extreme measure to a short-term problem.
Having said there are two principal reasons why HELOC is seen as a bad way to consolidate credit card debt, there is in fact a third reason. In most cases credit card debtors use HELOC as a short-term measure to consolidate their credit card debt. Most credit card debtors who consolidate their debt with HELOC financing do not cut up their credit cards, rather, shortly thereafter, the credit card debtor will have run up another line of credit against their credit card. To repay this line of credit the homeowner will arrange another line of credit against the residual equity in their home. Before long, the home no longer has any residual equity left, the homeowner has a number of loans they need to repay, and another line of credit remains outstanding on their UK credit card. This type of financial mismanagement is all too easy to do today, but it coffin nail to your long-term financial future, so think long and hard before using a HELOC to consolidate your UK credit card debt.
When it comes to getting the equity out of your home, one of the best tools available may be the home equity line of credit (HELOC). While not for everybody, it can provide you with the equity in your home, access to cash, and a way to choose how much money you use. Not every HELOC plan, however, is equal. Here are some things to look for when you start looking for your mortgage.
Home equity loans are a great way to take advantage of the equity in your home. Since you are not paying interest on all of the money only on what you use, it creates a handy way to use the equity – when and if you need it. During the draw period, you have free access to the money.
Before you sign the agreement for a HELOC, however, you need to know that it is basically a second mortgage. This means that it will add another payment each month and you need to know in advance how much it will be. You should be able to comfortably make the payment without it being difficult or creating too much of a financial strain.
As a second mortgage, you will also have various closing costs and other fees added when you sign for the loan. Among these, you will also usually find an appraisal fee, a surveyor’s fee, originator fees, and more. Some of these may be waived, but you will need to know what each of the fees is for. Some lenders are now charging few fees but you may need to look around.
Monthly and annual fees may also apply – depending on the particular lender. You need to look carefully at each of the fees to make sure you understand exactly what each fee is for.
The interest is also another thing that you should pay close attention to. Home equity lines of credit are most often adjustable rate mortgages which means that the payments are flexible and will frequently change. Find out how often the interest rate is calculated in order to get the best rates. It is not uncommon for the rates to be calculated on a daily basis, and sometimes it is on a monthly time frame.
Many HELOC’s also have what is called a margin, which is basically another interest above the interest rate (APR). The thing about this is that you will usually not be told what the interest rate is – unless you ask about it. There could be quite a variation in the margin rates – so be sure you ask, and do not take it for granted that it will be low with that particular lender.
You will also want to know how the home equity loan will be amortized. Some of these have balloon payments that are due at the end of the draw period. Your only option may be to refinance at that time. Oftentimes, though, your amortizing payments are set up at the end of the draw period, and you simply start paying till the loan is paid for. Check to see if you have the option to automatically renew your home equity line of credit, too, since some lenders will do that for you.
Making some changes around your home is a great way to help you enjoy your home even more. There is so much you could do to improve the living space, the kitchen, bathroom, or even add a garage or a new sunroom. Each of these costs money, and one of the most practical ways to finance your next project is by getting a home equity line of credit (HELOC). Here are some common sense reasons why this could be the best way for you to go.
Open An Account
A home equity line of credit will enable you to get an account with a credit limit. This will be established by the lender and will be based on your credit score, current indebtedness, amount of equity available, and your ability to pay back the loan. You will be given access to this line of credit by either a credit card or as a checking account.
Get One Loan – Many Purposes
The money in your account is yours to use however you want. If you have more than one home renovation project and are not sure of the total costs involved, then this is the simplest way to go about it. Or, if you want to do several things with the money – but not all at once, then, again, this is the perfect solution to those needs.
Out of the money your receive, you could do things like:
Home renovations
Consolidate Debt
Cover medical expenses
Take a vacation or trip
College education
Buy a car or boat
Have emergency money
If you wanted, you could even do more than one of these things.
A home equity line of credit is usually an adjustable rate loan. This means that after a fixed rate period, the rates will change on a regular basis. The rate is based on the market rate and a margin.
Pay Interest Only On Portion You Use
One thing that makes a HELOC such a good investment is that you only pay interest on the money that you actually take out of the account. This makes it ideal for more than one project, and gives you the privilege of saving money on the portion you are not yet using.
In many cases, you have an option as to how you want to pay on your home equity line of credit. You could pay only the interest each month during the draw period. This period of time gives you a specified time in which you are allowed to take out more money. Another option is to make fully amortizing payments. This payment amount will be calculated monthly in order to keep up with how much you take out.
Different Amortization Methods – Pay Attention
Lenders have different ways to amortize their HELOC products when the draw period closes. You will need to know the method they will use to avoid surprises. One of these is to calculate fully amortizing payments and give you the balance of the 30 years to pay it off. Another way is to require a balloon payment at the end of the draw period. This means that you will probably need to refinance it. Some newer products simply roll the money over again to make it available to you – even without applying for it.
Whichever home equity line of credit you choose, be sure that you do some shopping to find a good deal. HELOC’s vary quite a bit among lenders, and so do their terms. Be sure you find out about the margin rates and how it amortizes.
When you need the cash out of the equity in your home, you may find that there are a few choices that are before you. Should you go with a home equity loan, or would a home equity line of credit (HELOC) be better? Here are some features of both to help you decide which one may be better for you.
If you are certain that you would like the cash out of your equity in one lump sum, then a home equity loan would be the better option for you. This means that if you know that you want the equity right away and have a purpose (or more than one) that you need the money for, then this would be the way to go. The cash from a home equity loan, or a home equity line of credit can be used in any way you want. If you want to pay for a family member’s college education, or get a boat, fix up your home or make an addition, or travel, then this could be your ticket.
A home equity loan is a second mortgage, and you will often be given up to 15 years to repay the loan – or more. It is usually in the form of an adjustable rate mortgage, but you can also find lenders who will give you fixed rate, too.
A home equity line of credit, though, will give you a few options that a home equity loan will not – if you do not need the cash all at once – or are not sure if you need it all. A HELOC is also a second mortgage, but instead of getting all the cash up front, you are given a line of credit and a credit limit. A credit card, or a checking account gives you the access to the funds – as you need them.
Generally, you must make a minimum draw right away and then you start paying the interest on a monthly basis of the amount you have withdrawn. This is a major difference right here. You only pay interest on the portion of the money that you have actually withdrawn. So if you do not use it all, then your monthly payments and interest are lower. The interest is often calculated daily, and so each month will see a different size payment. You are also given a limited time to withdraw the funds – often around 11 years.
A HELOC is usually calculated on a 25 or 30-year term, and this is broken down into two periods – the draw period and the amortization period. During the draw period, you use the funds as you see fit. But at the end of the draw period, the time for amortization begins. You cannot draw out any more money, but your payments are recalculated and you begin paying off the loan.
There are several ways that you might do this, though, and you need to know which one will apply to your mortgage before you sign. It is possible that there could be a balloon payment at the end of the draw period. This would require that you refinance. Other terms may simply be monthly payments for the balance of the full-term, or other arrangements may be possible, too.
Only you can know which one, either a home equity loan, or a home equity line of credit, will be better for your needs. Whichever way you decide to go, though, be sure to get several quotes and then compare them carefully to know which one is the best deal. There may be quite a bit of difference in the interest rates and other terms – some are good and some just plain are not good.
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Home equity loans are a great way to get the cash you may need – for just about any reason. It could also be enough money to fulfill some of your dreams, too, if you have lived there for some time. Many people are tapping into their home equity in order to do some things they have always wanted to do. Still, though, there are some traps along the way that can be costly to those who are not watching. Here are four things to watch for when you get your home equity line of credit.
What Is The Interest Rate?
Probably one of the most important things that you need to watch for is the interest rate on the home equity line of credit (HELOC). This will mean that you need to watch the market some and be a little patient. Wait until you see that the interest rate is good. The interest rate may be near that of a first mortgage, but will often be a little higher.
Besides the interest rate, though, there will also be what is called a margin. This is an interest rate that is added to the prime rate, and it remains on it for the life of the loan. This figure is variable with each lender, and they often will not reveal it unless they are asked. You need to ask, because this could, in some cases literally double the interest you will be required to pay.
Is There A Guaranteed Conversion – If Necessary?
Because a home equity line of credit is an adjustable rate loan, you will want to have the protection of being able to convert – if necessary. This means that if the prime rate becomes high, that you will be able to convert your now high interest loan to a fixed rate loan. Oftentimes, adjustable rate loans have no caps on the interest rates, or very limited control over the caps. Currently, there are only about two states that put a cap on it – of about 16 to 18%!
What Charges Apply?
A home equity loan can come with quite a few charges – or just a couple of them. It really is up to the lender and what they think they might be able to get away with. Many home equity lines of credit do not have any closing costs now, so look around to find one that does not.
Other charges may include a charge per check that you write. Another is a charge that will be given you if after a certain period of time you have not withdrawn any more money – often referred to as an inactivity fee. Then there may be an annual fee, or a monthly fee for participation in the program.
How Is It To Be Paid For – Amortized?
Another thing that you must look into is to find out how the home equity line of credit
loan is to become amortized. You need to know how long is the draw period – the time that you have to withdraw the funds as you need them, and when you start paying on the principal of the loan. Some HELOC’s require a balloon payment for the full amount at the end of the draw period. This would require that you refinance the loan. Other plans require that you start making payments that will fully amortize the amount you borrowed, but the time period to do so may vary.
As you can see, there are many different features given by different lenders. You want to make sure that you get several quotes when you go to apply for your home equity line of credit. Then carefully evaluate and compare them in order to find the features you like and that will fit your particular need for your equity.
When it comes to getting money out of the equity in your home for that project, or expense, that you have, a home equity line of credit (HELOC) may be the best way to go. It gives you a number of options that other equity loans do not give, along with the flexibility of being able to make some choices. Here is how you can make a home equity line of credit work for you.
A home equity line of credit is a second mortgage (in most cases), and as such, it will add another payment to your bills each month. This means that you need to be careful about how much you borrow. For this reason, you should determine how much of a payment you can afford each month so that it will not be a problem to come up with the money each month. You do not always want to let a lender determine this for you – they cannot lose whether you make the payment or not. Closing fees may or may not apply, but since many lenders have few fees for closing on a HELOC, you should look around and find one that does not.
Once you are approved for the loan, you will have an account set up for you, which will have a credit limit. You will be issued either a credit card, or a check book, that gives you access to the funds. Many lenders who give home equity lines of credit require that you make an immediate withdrawal, and some will require each withdrawal after that to also be of a minimum amount.
A home equity line of credit gives you the opportunity to withdraw as much money as you need – when you need it. There is also a draw period, which is a period of time that you are allowed to make withdrawals. This could be up to about 11 years – depending on your home equity line of credit terms.
During the draw period, you will be paying the interest on the amount of money that you have used so far. The interest that you will be paying will most likely be calculated on a daily basis in order to keep current with your withdrawals. You need to be aware, though, that unless you opt to do otherwise, you are only paying the interest, which means that you will have 100% of the loan to pay during the amortization period – or as a balloon payment at the end of the draw period. If possible, you may want to pay down some of the principal, too, in order to have reduced payments later. You will want, however, to check with the lender to make sure that there is not any early payoff penalty.
Certain fees may also apply to your HELOC. Some lenders will charge you with an account maintenance fee. This could result in a monthly charge, an annual charge – or both. There also may be a per withdrawal charge, and possibly even a no activity charge. Since a lender only makes money on a HELOC when you withdraw the money they do not want to see their money not being used – and earning interest for them. By looking around, however, you could find a home equity line of credit that does not have all of these charges associated with them.
Getting a home equity line of credit is a great way to get access to the equity in your home. In fact, it may be the best way to use that equity – unless you know you have need of all of the money that is available. Here are some of the advantages that you can have with a home equity line of credit mortgage.
First Advantage – Get The Money As You Need It
With any other kind of loan, you will get a lump sum. Your interest rates and payments are set. There are no options. With a HELOC, however, you are given a line of credit and a credit card or checking account that gives you access to the funds. You do not have to use all of it, if you don’t want to. This is especially good if you know that you need some money, but really are not sure just how much.
This kind of flexibility is great, because you are given a draw period in which you can get more money when you need it. This draw period can be up to 11 years. The truth is, who knows what kind of funds you may need in the next 11 years, or so? This gives you access to sufficient money as you need it and for projects – as they come up.
Second Advantage – Pay Interest Only On Money Used
A home equity line of credit only charges you interest on the money that is drawn out of the account. You are not being charged for money that is sitting idle – as it might with other types of loans. With those loans, you are paying interest on the full amount – whether you are using the money or not.
Third Advantage – Lower Interest Rate
The interest on a home equity loan is usually lower than other types of second mortgages. Usually it is just about two percent above the prime rate.
Fourth Advantage – Possibly No Closing Costs
Most HELOC’s have no closing costs! This certainly makes it the loan of choice, and it can save you a lot of money by not having these charges added to the loan. Some lenders will charge you closing costs, so this should be a good incentive to find one that does not. It will result in considerable savings at closing time.
Fifth Advantage – Tax Deductible
The interest that you are charged each year in a HELOC is tax deductible. Ultimately, this brings the actual interest rate down lower and means an even greater savings.
Some lenders may even use a home equity line of credit on top of an 80% first mortgage in order to eliminate the Private Mortgage Insurance. The way it is done is to get the first mortgage, pay your downpayment, and then get the HELOC for the balance. Make sure you also have enough for the closing costs at settlement, too.
A home equity line of credit can come with a number of other fees and charges. Some will charge a monthly fee or an annual one (or both), and others may charge you if you let the money sit too long without using it. These charges can be avoided if you shop around for the best deal. A HELOC is an adjustable rate loan with few caps (if any) in place. Some of these will come with guarantees of convertibility to a fixed rate loan if the interest rates get too high. Also, be sure to look for any penalties that you may incur if you pay the loan off early.
When you are looking for the cash you need to fix up your home, a home equity line of credit (HELOC) may be just the thing for you. This would be especially true if you have a project in mind but are not sure what it may cost. A HELOC could be just the solution you are looking for – because it offers you cash with different options than a traditional mortgage. Here are some of the benefits.
A home equity line of credit is to be considered as a second mortgage. After you fill out the paperwork, and the lender looks over your credit report and your ability to repay the loan, you will be given a credit limit. This means that an account is set up for you, and you will be given access to it either with a credit card or with checks. This way, you can draw out the money as you need it, and only as much as you need.
A home equity line of credit is usually based on a 25 or 30-year time frame. There is a draw period and a payment period. The draw period could be up to 11 years, and the rest of the time period is used for repayment.
You only pay interest on the amount that you draw out. This is an excellent way to save some money, because you still have access to more if you do need it. During the draw period, you will be paying interest – adjustable rate, on the amount of money you have taken out. The interest rate does not amortize the loan in any way – since you are only paying interest.
At the end of the draw period, however, the amortization period starts. Your payments will be calculated on how much you have withdrawn and your payments will be determined at that time. These payments will fully amortize the loan within the time remaining – most of the time. Some lenders do not calculate the payments to fully amortize the loan. Obviously, you will need to watch for this before you sign the agreement.
Home equity lines of credit can come with a number of repayment options. These range from balloon payments at the end of the draw period, to simply monthly payments for the rest of the term. Other options that may be included is the possibility of renewability. Some lenders give this option for those who want an ongoing line of credit.
Before you sign up for a home equity line of credit, though, be sure to compare a number of quotes first. A home equity line of credit may have monthly fees, annual fees, and more, so be sure you know about them all first. By comparing several plans, you can find the one that will be the least expensive, have the lowest rate of interest, and will be the best for you.