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If you’ve already opened up a Home Equity Line of Credit (HELOC), or are thinking of it, you should know there are other well-suited options. As is sometimes the case when buying a home, you can get caught up in the excitement of a large renovation project with the colors, the new cabinets and larger space. However, it’s in your best interest to take just as much care with your selection of home equity financing.
There are three major downsides to the standard HELOC:
1. Teaser rates
Most HELOC rates are adjustable and move in sync with rate increases dictated by the Federal Reserve. They typically have very low “teaser rates” in the first 1 to 3 years. After this period is over, your rate will adjust to the “floor rate” (nowadays typically 4.5 percent), increasing your monthly payment. Your rate from that point forward will never be lower than the floor rate.
2. Rate increases
As the interest rate environment increases, so will your rate. Coming out of your initial teaser period, your rate could be substantially higher than the 4.5 percent floor, further increasing your payment.
3. Payment shock
The third and most commonly overlooked downside to a HELOC is the payment shock when you must begin to pay back the principal. Typically, HELOCs require only interest to be paid over the first 10 years. After the initial 10-year “draw period,” you then need to begin repaying the principal in addition to the interest. This can cause payment shock for many borrowers, and as mentioned in numerous reports, HELOC delinquencies are on the rise.
Consider a HELOC with a $150,000 balance at a 2 percent teaser interest rate.
It would have an initial monthly payment of $250.
By the time your teaser rate period is up and your rate adjusts to let’s say 5 percent, during your principal payback period, your payment would increase to $1,590 per month assuming a remaining 10-year repayment period.
The great news is there are alternatives. Myers Capital offers homeowners Fixed Rate Home Equity Loans. Your rate and payments are fixed for 15, 20 or 30 years. There is never a restriction on how you wish to use the funds, and there is never a prepayment penalty. The predictability and safety of a fixed rate home equity loan can make an incredible difference in your financial future.
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