The Right Equity Loan for You
By Lisa Scontras
Getting your finances back on track should-n’t mean cashing out your IRA or dipping into college or retirement savings. In fact, by tapping into the financial power of your home’s equity, you can preserve your hard-earned nest eggs while paying for big-ticket items more efficiently, consolidating debt, paying for private school or college tuition, or funding your home repairs or improvements. If you have equity in your home, there are two basic ways you can borrow against it: with a home equity line of credit (HELOC) or a home equity loan (HELOAN).
The popularity of these products is their low interest rates — which are almost always lower than the more traditional credit methods. The basic difference between how these loans work is how and when you draw on your equity. A line of credit allows you to draw on funds as you need them, up to a predetermined limit, while the equity loan is a one-time lump sum distribution.
“If you have a specific need and need a lump sum of money all at once, it is best to take out a home equity loan,” says Charlie Sy, assistant vice president of credit products at First Hawaiian Bank. “A home equity loan offers many advantages over a home equity line of credit. It is a fixed-rate loan, hence your rate will not increase over the life of the loan, giving you peace of mind. And your payments are also fixed, allowing you to budget better.”
Additionally, a home equity loan generally has these advantages:
• No annual fees
• You can borrow a set amount to pay any large, onetime expense and know exactly when that loan will be paid off
• If you have already paid off your mortgage or have a small balance remaining, a home equity loan can act as a traditional mortgage to refinance the existing lien — processing is often faster and less costly than a traditional refinancing of a first mortgage
• A low, fixed-rate home equity loan can be used to pay off a home equity line of credit that is on a short-term teaser rate or a variable rate
“Our Consumer Home Equity Loans are ideal for the homeowner who has been on the sidelines, wanting to take advantage of today’s low rate environment, but does not want to pay the high, out-of-pocket costs associated with a mortgage,” says Sy.
On the other hand, if what you’re looking for is credit to be used as needed, a home equity line of credit may suit your need for flexibility. Much like a credit card, you will have a maximum credit limit and can access the funds anytime by simply writing a check.
With this type of revolving credit line, as you pay down your balance (the money you’ve drawn), the credit becomes available to you again. If you’re making ongoing payments, such as for your child’s tuition, you may like the idea of a HELOC, as long as you’re comfortable with the variable rates and monthly payments — which fluctuate based on your balance and interest rate for that month.
And even though HELOCs seem to be a popular choice right now, Sy cautions borrowers against having too optimistic of a payoff plan.
Because lenders and borrowers alike are focused on the introductory rates being offered, it is easy to get caught up in taking advantage of the introductory rates. And while the introductory rates work well for some homeowners, others find that it takes much longer to pay off the loan and, consequently, end up paying much more over the long term after the teaser rates end.
“First Hawaiian Bank wants to help our customers plan better for the future — with their short-term and long- term goals,” he says. “Our home equity loan product offers a low rate of 3.75 annual percent rate for a very long term, fixed for 10 years.”
Own your home free and clear? One of the virtues of this product is that it can be used as a first mortgage. According to Sy, the product is unique in that it also makes the equity in your home accessible without paying the points associated with refinancing your first mortgage.
“For this reason, if you have refinanced recently and it does-n’t make sense to refinance again because you already secured a low rate on your mortgage, you might consider a HELOAN instead,” says Sy.
NAR chief economist Lawrence Yun says home prices are set to rise in more markets during upcoming quarters, which helps homeowners even if they aren’t planning to sell. “It’s most encouraging to see a growing number of metro areas with rising median prices, which is improving the equity position of existing homeowners,” he says.
Need some help to make sense of what’s best for you? First Hawaiian Bank makes it easy to sort through all the options available by assigning a personal banker to you. Personal bankers can help you decide which type of product makes the most sense for you. They can walk you through each scenario, to see how much you can save, and compare a home equity loan and home equity line of credit.
Talk to your personal banker at First Hawaiian Bank and find out how you can save money by lowering your interest rate on outstanding debt.
Reasons for choosing a Home Equity Loan
1. Your home is paid off and you’d like to tap into your equity, but don’t want the cost and the cumbersome paperwork associated with a new mortgage
2. You currently have a balance on your home equity line or on a short-term introductory rate and would rather have a fixed rate
3. You want to take advantage of your home’s equity at today’s low rates and secure it for a long term
4. You prefer fixed monthly payments, to make budgeting easier
5. You want to refinance, but don’t want to pay points
6. You want to consolidate outstanding debt, credit card, personal loan, auto loan, etc.