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Best Uses For A Home Equity Line Of Credit

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Tapping into the equity in your home can be a great way to pay off debt, cover the cost of home renovations or even pay for a vacation or medical bills.

One of the most common ways homeowners can access equity is through a home equity line of credit or HELOC. Secured against the value of your home, a HELOC is a line of credit you can borrow from as needed and repay in installments over a certain period of time— much like a credit card. Here are some of the best uses for a HELOC and how to decide if one is right for you.

Is a home equity line of credit a good idea for me?

When making a significant financial decision like opening a HELOC, do your research to understand all the fees and loan terms as well as the impact of loan repayment requirements on your monthly budget. Here are some factors to consider when deciding whether a HELOC may be right for you:

  • Variable interest rate: Unlike other types of loans that allow you to lock in a specific interest rate, most HELOCs include a variable rate, meaning your monthly repayment amount could increase suddenly and unexpectedly. Make sure your household budget can handle this potential fluctuation. “Ask yourself whether you feel comfortable having an adjustable rate that can rise if interest rates rise, potentially increasing your monthly payments in the future,” says Matt Hackett, operations manager for mortgage lender Equity Now.
  • Funding needs: HELOCs offer the flexibility of borrowing what you need, only when you need it, making them a good choice for those who lack a defined borrowing goal or those who require ongoing access to funding. “A HELOC is great if you’re unsure how much money you need to borrow, or you need different amounts at different times,” says Yu Weismantle, lending product manager for Alliant Credit Union.
  • Responsible borrowing: Opening a HELOC provides access to a line of credit that you can draw from again and again for as long as 10 to 15 years. Managing the use of this type of fund requires discipline and a plan for repayment or you can easily get in over your head. “For fiscally responsible people, these can be amazing tools. For folks with less financial discipline or security, they can be devastatingly bad,” says Ryan Cicchelli, founder of Generations Insurance & Financial Services.

7 common uses of a home equity line of credit (HELOC)

A HELOC can be a useful and cost-effective way to pay for some of life’s major expenses. Here are some of the most common to consider.

1. Home improvements

One of the most popular reasons for opening a HELOC is home renovations. Because a HELOC allows for accessing large amounts of money over time as needed, it can be especially useful for costly, ongoing projects.

“A HELOC is ideal for renovations because they offer a high line of credit, low-interest rate and withdrawal flexibility,” says Weismantle. “And, once you’re done, you can have a long payment term.”

Home improvements can also increase the overall value of your home, making this type of use of a HELOC a wise investment.

2. Education

If mortgage rates are lower than student loan rates, a HELOC can be a good way to pay the cost of college tuition. Be sure your lender allows HELOCs to be used for this purpose. You’ll also want to investigate all possible student loan options before taking this route, as defaulting on a HELOC could mean losing your house. A student loan on the other hand is not secured by your home.

3. Emergencies

It’s always a good idea to have an emergency fund that includes three to six months of living expenses. If you do not have this type of cash set aside and an emergency arises, a HELOC can provide an option for accessing cash. When using a HELOC for this purpose, however, it’s a good idea to have a repayment plan or you could easily slip into deeper debt.

4. Paying off or consolidating debt

HELOCs generally offer a lower interest rate than unsecured debt making them a good choice for paying off credit cards or consolidating multiple types of high-interest unsecured debts. However, you will want to be careful when doing this. “Using a HELOC to consolidate debt is only a reasonable option if the individual has dealt with their spending issues; otherwise, digging a bigger hole of debt is a likely outcome,” says Steve Sexton, CEO of Sexton Advisory Group.

5. Real estate down payment

It’s not unusual for homeowners to access the equity in their homes in order to buy additional real estate, perhaps as a rental investment or vacation getaway. Similar to using a HELOC for education expenses, however, you’ll want to investigate all your borrowing options and make sure accessing your home’s equity is the most cost-effective way to achieve your goals.

6. Special events

Whether it’s a child’s wedding or a bucket-list vacation, if you don’t have the money set aside to pay for these expenses in cash, a HELOC can offer a more competitive interest rate than a credit card. Using a HELOC for such costs can also give you a longer repayment timeline, often as long as 20 years.

7. Building credit

Opening a HELOC can be a way to build your credit profile, in much the same way you might use a credit card for such a goal. Again, the key is responsible use. “You can do this by only drawing funds that you feel secure in repaying relatively quickly, making timely payments and not digging in too deep,” says Cicchelli.

Alternatives to a home equity line of credit (HELOC)

Depending on your funding needs, current interest rates, and your timeline, a HELOC may not be the best choice for everyone. Here are some additional funding options to consider.

Home equity loan

Similar to a HELOC, a home equity loan is secured by your home and usually offers a more competitive interest rate than unsecured loans. However, there are some noteworthy differences between HELOCs and a home equity loan that may make this option a better choice for you.

Home equity loans provide loan proceeds immediately, in one lump sum, as opposed to a line of credit that you can tap into again and again and pay back during a specified draw period.

“Home equity loans do not have a draw period so they may be better suited to those who have an immediate need or those who have certainty over how much cash they need,” says Nicole Straub, general manager of Discover Home Loans.

Another notable difference between a HELOC and a home equity loan is the interest rate. HELOCs typically come with a variable rate, while home equity loans include a fixed interest rate, allowing borrowers to have consistent, predictable monthly payments for the life of the loan. This option may be more suitable for those who need stability in their monthly budget.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a new one that’s larger than your outstanding loan balance. As part of the refinance process, you receive a one-time, lump-sum cash payment for the difference between your current mortgage and the new larger mortgage.

“While a traditional refinance loan will only be for the amount that you owe on your existing mortgage, a cash-out refinance loan will increase the amount of the loan, allowing you to pay off your existing mortgage and use your home’s equity to take an additional lump-sum payment in cash,” says Straub.

It’s important to keep in mind with a cash-out refinance that you will pay more in interest after completing a cash-out refinance because you’ve increased the amount of the mortgage loan.

Personal loan

Personal loans may be a good approach for those who don’t feel comfortable using their home as collateral for a loan. They can also be a better choice if you only need to borrow a limited amount of money. The proceeds from personal loans may also be available more quickly then a HELOC. Some lenders can even make funding available as soon as the next business day.

Personal loans also offer fixed interest rates that never change.

“Personal loans are easier to budget for because the monthly payment stays the same,” says Straub.

The bottom line

There are many cases in which a HELOC can provide a smart way to leverage the equity in your home to achieve other financial goals or pay for large expenses. Before opening a HELOC however, it’s always a good idea to shop around and crunch the numbers, ensuring that a HELOC is truly the most cost-effective option. In addition, you should have a repayment plan and be able to manage a HELOC responsibly.

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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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