Home Equity Loans and Lines of Credit -- A Powerful Financial Tool

Tuesday, July 23 at 10:15 AM
Category: Personal Finance

The equity you have in your home, which is the value of your home minus your existing mortgage, can be a powerful tool in managing your overall financial situation. While there are some risks with home equity loans and lines of credit* (as with any borrowing), they usually offer the attractions of lower rates, convenience and often tax benefits.

How does a home equity loan work?
Most institutions view home equity as good collateral and are often willing to lend you money against that equity. The amount they’ll lend depends on the amount of equity in your home and your other credit characteristics. A general rule of thumb is they will lend up to an amount so the total debt against your home (including the first mortgage and any other loans where your home is pledged as collateral) is less than 85 percent of the current value of your home.

Interest rates vary so contact your local lender for the current rate for which you are eligible. You may be eligible for 2.49% APR with Arvest’s summer loan sale** through July 31, 2013. To apply visit us online, stop by your nearby Arvest branch or call us at (866) 952-9523.

Usually, you repay the loan on a set schedule with minimum required payments. With some home equity loans or lines of credit, the minimum payments may only be the accrued interest or could include a percentage of the principal. However, in many situations, at maturity, you will be required to pay the balance in a single “balloon” payment. For example: At 2.49% APR on a $10,000 line of credit advance, if you paid only the accrued interest as your minimum monthly payment and took no other credit advances, in three years you will make 35 payments of $20.75 with a final balloon payment of $10,020.75 to be paid at maturity. Read your program disclosures and loan agreements carefully so you understand the commitment you’re making. 

Attractions of Home Equity Loans
Convenience – It’s usually easy to apply for and the approval process is often simpler than if you were applying for a new mortgage.

Interest rates -- The interest rates charged on home equity loans are usually greater than those on first mortgages but less than those on credit cards. Using the proceeds of a home equity loan to pay off credit card debt will usually save you money.

Tax benefits -- For individuals who itemize their tax deductions, the interest paid on home equity loans can help save some income taxes. While there are some limits on this type of interest deduction, it may save you some tax. Consult with your tax advisor for more details.

Flexible uses
Even though you are borrowing against your house, there is no requirement the money be used on your house. A home equity loan can be the source of funds for college tuition or even to buy a car. Compare the rates on an auto loan and a home equity loan the next time you are financing a car. A note of caution, home equity loans can take longer to get approval for than a standard auto loan.

Beware of the risks
Borrowing against the equity in your home should be considered carefully. Even though there are benefits, these types of loans are like other loans -- you pay interest and they must be paid off. Most people use home equity loans for "conservative" purposes and avoid making risky investments or extravagant spending with the proceeds. Read and understand all the details before signing. Loan documents can be confusing and the easy process of getting this type of loan can mask the costs and risks.

*$5,000 minimum credit line to open plan; property insurance will be required. Charges may include $100 for an Arvest appraisal fee, you may also pay third-party fees such as, appraisers, title companies and government agencies; these fees will range from $0.00 - $750.00. You may choose one of three options for minimum payments which may be made monthly or quarterly (quarterly payment option may be available) which include 1) Accrued interest only; 2) Accrued interest plus 1% of the principal balance if less than $50,000; or 3) Accrued interest plus .50% of the principal balance if greater than $50,000. At maturity, you will be required to pay the balance in a single “balloon” payment. Consult your tax advisor for deductibility. 

**Rates accurate as of July 18, 2013, all loans are subject to credit approval. Advertised APR is for consumers with a minimum credit score of 700, but we have other great rates and loan terms available. APR is limited to new loans with balances ranging from $5,000 - $150,000. Refinances of existing Arvest loans may qualify with an increase of 50% of current loan balance or $5,000, whichever is greater. Collateral restrictions may apply. Excluded loans include construction loans, bridge loans, real estate purchase transactions, and transactions originated through our affiliate, Arvest Mortgage Company. Offer valid June 1 through July 31, 2013. Available at all Arvest locations. 

Tags: Financial Education, Home Loans, Lending and Financing
Jolie Cameron on 11/27/2013 at 10:33 AM
Thanks for great information you write it very clean.I learned a lot.
Marie Herr on 3/1/2016 at 10:35 PM
I have received the advertisement with the baloons on them saying 'SALE' several times. I do not understand the statement "FOR A LIMITED TIME, WE'RE REDUCING RATES ON HOME EQUITY LINES." Is that a typographical error? Should it say "EQUITY LOANS"?
Arvest Blog Admin on 3/2/2016 at 7:52 PM

Marie - We're glad you saw the ad for our current promotion. The current sale is for home equity lines of credit and not home equity loans. For more information visit arvest.com/equity or stop by your local branch. We look forward to serving you.

Emma McKenzie on 9/29/2017 at 7:38 AM
Its really helpful post.

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