3 Things to Know Before Taking Out That Loan
Spring brings the promise of a fresh start—not only for nature as it comes back to life in full bloom, but also for the housing market. While the market has rebounded since the economic recession of the late 2000s, fewer foreclosures are evident and property values are stabilizing. While home prices appreciated greatly for the past several years, the National Home Price Index broke a 10 month streak of increases. This could indicate that the rapid increase in property values may be leveling off, great news for first-time borrowers looking to purchase a home.
Studies show that home improvement spending is expected to set records in 2016. For current homeowners this makes sense because more equity is your hands as your home has gained value. Between available equity and low interest rates, 2016 might be the year to do the home improvements or remodel you’ve been putting off. Using your home’s equity may be a great way to finance this.
If you’re thinking of getting a Home Equity Loan (HEL) or Home Equity Line of Credit (HELOC), here are the top three things you’ll need to know:
Your current financial standing
Spring-cleaning shouldn’t be limited to chores and yard work. You should take some time to clean up your credit as well. Now’s the time to get pull a credit report from one of the major credit bureaus like Equifax, Experian and TransUnion. Check your credit report before you start your loan process. It’s probably been awhile since you applied for your home loan—you’ll need to revisit the report and check for inaccuracies.
Lenders typically want you to have at least an 80% loan-to-value ratio, but this factor depends on your creditworthiness and other outstanding debts. This is because your home is the collateral used to secure the loan. You can calculate your loan-to-value ratio by taking the remaining balance on your mortgage and compare it to the value of your home. Some lenders have a range of acceptable loan-to-value ratios, so this baseline is just a starting point for a conversation with your financial institution.
It’s a good idea to use an online calculator to determine how repayment plans fit in your budget.
What you want to accomplish
Take a look at what you’re really going to use your equity for. Decide if you need a large amount of funds at one time, or you need the flexibility to draw funds, as you need them for a project. This information is crucial in helping you choose which is best for you, a home equity loan or home equity line of credit.
Are you coming up on a major life event or want to consolidate debt? Then, you probably only need to borrow a one-time lump sum. This means your lender would fully approve what you’re borrowing amount at closing with a fixed interest rate and monthly payments that never change.
Perhaps you’re looking to remodel your home or pay for college tuition. Both of these are potentially variable experience and may require you to be flexible in how much you borrow. If you’re among the 28% of homeowners planning to remodel, expand or improve their home this year, a HELOC might be right for you.
You’ll be able to draw funds as needed, up to whatever amount you’re approved for. HELOCs have a variable rate, and you only pay interest on the amount you borrow. Navy Federal’s draw period is 20 years, which will offer you maximum flexibility to use your funds when and how you need to.
When it comes to fees and interest rates on equity loans, it’s best to shop around and compare all costs involved. In addition to comparing the lowest interest rate, make sure you look closely at any fees and balloon payments. You may get a better deal for your home equity loan or line of credit from a different lender than the one that gave you a home loan – the two loans aren’t connected in any way.
Credit unions such as Navy Federal tend to have lower interest rates, fees and offer personalized service. Once you’ve closed on the loan, most lenders sell the servicing to other lenders. Navy Federal will always be the service provider for the life of its loans. This means you’ll always have one place to call for payments or questions. This convenience might be something worth considering when selecting a lender.
Just as the seasons change, so do your financial goals and needs. Taking a closer look at your current financial status, thinking about what you’re trying to achieve, and doing some good old fashioned homework can help spring you into the right equity option for you.
Editor’s Note: This post was originally published in April 2014 and has been updated for freshness, accuracy, and comprehensiveness.