What if we told you the average Illinois homeowner has $97,725 hiding in their walls? Not a secret stash of cash tucked away behind drywall, but rather the untapped value of their property, ready to be harnessed through a Home Equity Line of Credit (HELOC).
What we will go over in this guide:
HELOCs: Flexible & Affordable Financing At Your Fingertips
Is a HELOC Right for You?
The Balancing Act: Long-Term Benefits and Risks
Navigating Your HELOC
Why Trust First Bankers for Your HELOC Journey
From transforming your home with a modern kitchen to taking that dream beach vacation or even consolidating your debts, a HELOC could be the perfect tool to help you achieve your dreams.
We aim to give you the knowledge needed to make sound financial decisions. So we’ve created this in-depth guide to explore the ins and outs of HELOCs and understand why they're becoming the go-to choice for savvy homeowners.
If you would prefer to speak with one of our dedicated loan specialists first instead, please fill out the form below:
HELOCs: Flexible & Affordable Financing At Your Fingertips
Think of a HELOC as a credit card powered by your home equity, combining flexibility with favorable interest rates. Unlike a traditional loan, where you borrow a lump sum, a HELOC allows you to draw funds as needed, up to a pre-set limit based on your home equity.
The best part? You only need to pay the interest for as long as the HELOC is active, and your interest payments may even be tax-deductible (always consult your tax advisor).
But remember, with great power comes great responsibility. HELOCs are flexible, but they do come with an expiry date. The loan has two active phases:
🕜 Drawdown: The period you can access the loan during which you are only required to pay interest. At First Bankers, it's 7 years.
💸 Repayment: After your drawdown, you must pay off any existing balance on the line in one balloon payment.
If you only make interest payments, a sizable bill may land on your lap at the end of the seven-year drawdown. Since your home's equity secures your spending, planning your repayments wisely is crucial, or you risk bringing your home to foreclosure in the worst-case scenario.
Fortunately, there are several strategies to mitigate this risk. You can pay down the balance to restore your home's equity before the draw-down period ends, set aside funds for future repayment, or consider refinancing options.
Don’t worry; we will go into these strategies in detail later.
The Power of Home Equity
So, what exactly is home equity, and how does it power your HELOC?
Home equity is the difference between your home's current market value and outstanding mortgage balance. A HELOC allows you to borrow up to 85% of your home's value minus the remaining mortgage.
For instance, if your home is worth $200,000, and your remaining mortgage is $100,000, you could unlock up to $70,000 through a HELOC. Here's the math:
$200,000 (home value) x 85% = $170,000 - $100,000 (remaining mortgage) = $70,000 (potential HELOC)
Is a HELOC Right for You?
To answer this question, we need to ask two more: Would you qualify? And is it the right tool for your situation?
Minimum Requirements for a HELOC at First Bankers
Let's start with what we are minimally looking for to open a HELOC:
1) Collateral - Unsurprisingly, the first qualifying factor is that you must be a homeowner and have sizable equity in your home. There will be nothing to borrow against without sizable equity, given the 85% home value maximum.
Here are a few other requirements of your home:
a) You are leveraging your primary residence.
b) It is within Illinois, Iowa, or Missouri.
c) You must maintain property insurance.
2) Credit - We are looking for at least a 680 credit score for you to qualify for HELOC.
3) Debt-to-income (DTI) - To ensure your payments will be manageable, we pull your credit report to assess the ratio of your current debts to income.
Is a HELOC the right tool for the job?
If you'd qualify, next, we need to answer if this is the best financial tool for your needs.
As we talked about earlier, HELOCs are flexible and affordable. These qualities make them perfect for situations where you need access to cash but are unsure of the cost and you like the lowest rates possible:
✅ Home Improvements
✔️ Updating your kitchen
✔️ Aging-in-place renovations
✔️ Making a home office
✅ Debt Consolidation
✔️ Paying off college tuition
✔️ Combining previous home improvement debts
✅ Vacation or Travel
✅ Business Expenses
Although we all wish that a quote for a home improvement project were final, unexpected costs happen. You must reapply or pay out of pocket with a traditional loan to finance these expenses.
Here is the power of a HELOC, if your project is over budget, you can borrow more, or if you find ways to go under budget, borrow less and pay less interest.
What this looks like in the real world:
Let's consider Emily, an O'Fallon homeowner planning to revamp her kitchen for the holidays. She first got a quote for $15,000 from a local contractor. Then being financially savvy, Emily consulted a Loan Specialist at First Bankers to discuss her options.
With her great credit, low DTI, considerable home equity, and possible changes, Emily and her lender agreed on a HELOC - opening a $100,000 line of credit.
When the construction team started work, they noticed that Emily's sink was leaking, rotting the flooring, and that they would need to replace it -increasing the cost by $5,000.
Several months later, Emily loved the kitchen so much she decided to have the contractors remodel her dining room to match. Between the construction and furniture, it cost an additional $10,000.
Had Emily originally gotten a loan for $15,000, she would've needed to reapply for both the flooring and dining room or pay for it out of pocket.
With her HELOC, she could access funds quickly and easily, completing the updates just in time for her family's annual reunion.
🛑 When HELOCs are not the answer.
Since we care about your financial well-being, we want to explain when HELOCs are not the right choice. If you are considering a HELOC to cover debts, it's essential to ask: Why am I covering my debts with debt?
If, with careful thought, you're looking to consolidate your payments with a lower interest rate and you plan to pay it off, ignore this; you're golden!
With that said, if you do not currently have a handle on your spending habits and are paying off rising credit card debt, be aware. You are simply pushing the issue off and risking your home. The best thing you can do is first get your spending under control.
The Balancing Act: Long-Term Benefits and Risks
In 2016, the Cubs won the world series. Seven years is a long time. For a complete picture of whether HELOCs are right for you, you need to understand possible long-term costs and benefits:
Long-Term Considerations
Variable Interest Rates: The interest rate for a HELOC at First Bankers is equal to the prime rate, as published in the Wall Street Journal, plus a margin of 0.50%. We've capped the APR at 19% on all our home equity accounts, offering you a safety net against extreme rate variations.
You need to consider your rate fluctuating because if your current rate stretches you financially, it can go up. With that said, your rate fluctuating isn't inherently a bad thing. Given the length of a HELOC, rates are likely to go up and down.
Changing Housing Prices: Real estate values can fluctuate significantly over the span of a HELOC. A rising market can increase your home's value, potentially boosting your accessible equity.
On the other hand, a market downturn could reduce your home's value, affecting your borrowing power and potentially leaving you owing more than your home is worth. This market volatility underlines the importance of a prudent borrowing strategy, ensuring comfort with your repayment plan, regardless of market conditions.
Long-Term Opportunities
Credit: HELOCs, like any other loan, can influence your credit standing. Timely repayment can contribute to a healthier credit score, which may offer you more favorable interest rates when refinancing or applying for future loans.
Tax Implications: Bankrate reports that the IRS allows deductions for HELOC interest payments for home renovations. However, tax laws can fluctuate, so it's wise to consult with a tax advisor to understand which deductions you're eligible to claim.
How do I mitigate these risks?
Now that we've gone over the risks of a HELOC in-depth let's talk about avoiding them.
1) Be Informed: You've read this article means you are ahead of the game. Like any tool knowing how to and how not to use a HELOC is the most vital step to avoid risks.
Understanding your loan, terms, interest rates, and repayment schedule before taking out a HELOC is the best way to mitigate these risks. Our team at First Bankers can help you navigate this process. Our experienced loan specialists are here to help determine if a home equity line of credit fits your needs and, if so, to make sure you fully comprehend the loan terms. Click here to connect with one of our lenders!
2) Be Realistic: It's equally important to be realistic about your financial situation, ensuring you don't borrow more than necessary or what you can afford to repay.
Flexibility is both the greatest benefit and biggest potential pitfall of a HELOC. Even though your project may not have a specific budget, you should have a maximum amount of debt determined before you open your account.
Remember to build a buffer for changes in the housing market and interest rates to ensure you aren't surprised.
3) Prepare: At the end of your seven-year HELOC, depending on whether you made payments toward your principal, you may have a sizable balloon payment due.
Don't worry; we offer refinancing options to qualified applicants. So make sure you speak with your Loan Specialist before your repayment date.
Navigating Your HELOC
If you've stuck around this long, you're probably interested in a HELOC. So let's dive into the phases of the loan and what you need to do at each step of the process:
Phase 0: Apply for the HELOC (Before the Loan Begins)
Required Documents: You will need your most recent pay statement, W2, and photo ID for the application.
Start-up Costs: To get started, we charge a one-time fee ranging from $300 to $1,000. This includes a document fee, flood report, credit report, and mortgage recording fee.
Two factors cause the variation in cost:
- Whether we need an appraisal.
- We will perform a title search for loans over $100,000, scaling up with the amount.
Application Process: If you still have any questions before applying, don't hesitate to contact our Loan Specialist, who will gladly help.
Once you're ready to apply, click here. The application takes about 20 mins and will ask for the information we need to assess your credit, DTI, and home value.
Once all the necessary documentation is submitted, you can expect to hear back about your loan approval or denial within a day or so and sign documents in 2-3 weeks.
Phase 1: The Drawdraw Down Period (Loans start - Year 7)
This phase is the active part of your HELOC. It's when you can borrow money up to your limit; you only need to pay the interest each month. As discussed, that rate is the prime rate +.50%, per the WSJ.
Set up Automatic Payments to ensure you never miss a payment; click here to learn more. Please also sign up for eStatements; learn more here.
Phase 2: Repayment (End of the Loan)
After seven years, the HELOC will close, and the amount borrowed will be due in a single balloon payment unless you’ve been paying down the principle. However, please speak to your Loan specialist about financing options.
Why Trust First Bankers for Your HELOC Journey
As you prepare to harness the financial potential within your home, the choice of a banking partner can be as influential as the decision to opt for a HELOC. At First Bankers, we've positioned ourselves uniquely at the intersection of local insights and advanced digital solutions, ensuring you're never alone on your financial journey.
Our dedication to realizing dreams extends across the Midwest from our headquarters in Quincy. Rooted firmly in your community, we believe in growing and succeeding together.
The human element remains integral to our operations. Anytime you need assistance, you can walk into our branch to connect with real people, ready to extend their support. Local banking goes beyond transactions; it fosters relationships and ensures excellent service.
Simultaneously, our innovative digital banking suite guarantees a smooth, efficient, and secure banking experience. Access your HELOC, review your balance, or plan your next financial move from anywhere, anytime, with just a few clicks.
Conclusion
Whether you envision a kitchen remodel, college tuition, debt consolidation, or a significant expenditure, a HELOC from First Bankers offers a dynamic and cost-effective way to tap into your home's value. Backed by our devoted team and competitive rates, we're your trusted partners in achieving your financial aspirations.
The path to financial empowerment is just around the corner. If you're ready to unearth the potential of a HELOC, let us guide you.
Complete the form below or visit your local branch to speak with a Loan Specialist today. We're eager to guide you toward discovering the true power of your home equity and transforming your dreams into reality.