Understanding HELOC Payment Risks
2009-05-19 by Lee
2009-05-19 by Lee
Home equity lines of credit (HELOC) are an overall sound way to borrow money, but they can be very deceptive. Monthly payments can be grossly understated to inexperienced borrowers, causing the cost of borrowing to appear very cheap. If you are considering a HELOC, there are several elements you want to keep in mind regarding the repayment structure.
Beware of low starting rate
Many home equity lines of credit offer a low starting interest rate, which will eventually rise by multiple percentage points. If you are considering a HELOC, it is important to evaluate the interest rate structure. Depending upon the loan, the low rate does not have to be claimed as introductory, especially if you are engaging in an adjustable rate mortgage. Banks will entice borrowers with low early rates, which become higher rates after a few years. The difference in just one percentage point can impact the overall HELOC balance significantly.
Evaluate balloon payments
With a HELOC, you may be offered a monthly payment that is subsidized by a large lump sum payment at the end of the loan ??? or in the case of the metaphor, at the end of the string. This lump payment greatly decreases your current monthly payment. If you do agree to a balloon HELOC, make sure that you can pay the balloon payment; you do not want to borrow for a balloon payment. Balloon payments can be added at any time of the repayment, and you should check these details with your lender. For the most part, balloon payments are a HELOC marketing strategy aimed at people who ???payment shop??? or look for the lowest monthly payment, regardless of terms.
Monitor payment shopping
If you are payment shopping, it is critical to evaluate your HELOC loan length. Many consumers focus on the payment, which usually leads to lower monthly payments concealed with less-than-favorable long-term loan terms. While it is appealing to pay just a few dollars a month for a large loan, in the long run, you will pay significantly in interest. The monthly HELOC payment should be taken in consideration, but only if the rest of the variables are reasonable. $40 per month for the next 90 years is not a financially savvy option.
Beware of high payments
High monthly payments can also put a strain on your financial situation. The best cure for high HELOC payments is to eliminate debts. Rather than payment shop, consider if the purchase is worth the monthly payments in the first place. That new big screen might be nice, but paying for the next 10 years should not be an option. You never want the payments to outlive the device.
Remember your home is on the line
HELOCs are secured by your house. While your credit cards do not pose a risk beyond your credit score, your HELOC can risk your livelihood. Your home is the security for your HELOC and can be taken on any default ??? and that is an important fact to remember.
Although HELOCs can be beneficial for certain life milestones, such as college tuitions, medical bills, or home improvements, it is important to ensure that you are financially savvy while obtaining your home equity line of credit. If you keep the long-term picture in mind during your negotiations, then you can obtain a HELOC that still maintains your financial health.
Beware of low starting rate
Many home equity lines of credit offer a low starting interest rate, which will eventually rise by multiple percentage points. If you are considering a HELOC, it is important to evaluate the interest rate structure. Depending upon the loan, the low rate does not have to be claimed as introductory, especially if you are engaging in an adjustable rate mortgage. Banks will entice borrowers with low early rates, which become higher rates after a few years. The difference in just one percentage point can impact the overall HELOC balance significantly.
Evaluate balloon payments
With a HELOC, you may be offered a monthly payment that is subsidized by a large lump sum payment at the end of the loan ??? or in the case of the metaphor, at the end of the string. This lump payment greatly decreases your current monthly payment. If you do agree to a balloon HELOC, make sure that you can pay the balloon payment; you do not want to borrow for a balloon payment. Balloon payments can be added at any time of the repayment, and you should check these details with your lender. For the most part, balloon payments are a HELOC marketing strategy aimed at people who ???payment shop??? or look for the lowest monthly payment, regardless of terms.
Monitor payment shopping
If you are payment shopping, it is critical to evaluate your HELOC loan length. Many consumers focus on the payment, which usually leads to lower monthly payments concealed with less-than-favorable long-term loan terms. While it is appealing to pay just a few dollars a month for a large loan, in the long run, you will pay significantly in interest. The monthly HELOC payment should be taken in consideration, but only if the rest of the variables are reasonable. $40 per month for the next 90 years is not a financially savvy option.
Beware of high payments
High monthly payments can also put a strain on your financial situation. The best cure for high HELOC payments is to eliminate debts. Rather than payment shop, consider if the purchase is worth the monthly payments in the first place. That new big screen might be nice, but paying for the next 10 years should not be an option. You never want the payments to outlive the device.
Remember your home is on the line
HELOCs are secured by your house. While your credit cards do not pose a risk beyond your credit score, your HELOC can risk your livelihood. Your home is the security for your HELOC and can be taken on any default ??? and that is an important fact to remember.
Although HELOCs can be beneficial for certain life milestones, such as college tuitions, medical bills, or home improvements, it is important to ensure that you are financially savvy while obtaining your home equity line of credit. If you keep the long-term picture in mind during your negotiations, then you can obtain a HELOC that still maintains your financial health.
