As housing prices continue to rise homeowners are looking into how they can leverage their home’s equity to receive low-interest financing. A home equity line of credit, or HELOC, is a great way to gain access to a line of credit based on a percentage of your home’s value, less the amount you still own on your mortgage.
The downsides are that if get yourself into a situation where you cannot repay your HELOC, the lender may force you to sell your home in order to settle the debt.
How a HELOC Works
Let’s say your home has an appraisal value of $400,000 and you have a remaining balance of $200,000 on your home’s mortgage. A lender typically allows access to up to 85% of your home’s total equity.
(Value X Lender Access) – Amount Owed = Line of Credit
$400,000 X 0.85 = $340,000
$340,000 – $200,000 = $140,000
Unlike home equity loans, your home equity line of credit will have a variable rate, meaning that your interest rate can go up and down over time. Your lender will determine your rate by taking the index rate and adding a markup, depending on the health of your credit profile.
When a HELOC Makes Sense
Your home equity line of credit is best used for wealth-building uses such as home upgrades and repairs, but may also be used for things like debt consolidation, or the cost of sending your kid off to college. While it may be tempting to use your HELOC for all sorts of things, such as a new car, a vacation, or other splurges, these don’t do anything to help improve your home’s value. To ensure that you will be able to pay back your loan, it’s important to focus on wealth-building attributes where you can.
Home Equity Line of Credit vs. Home Equity Loan
If you’re exploring various lending options, you’ve probably come across two different home lending terms, home equity line of credit and home equity loan.
While home equity loans give you all the flexibility and benefits of tapping into the value of your home when you need it, a home equity loan offers a lump-sum payment.
Depending on your situation, a lump-sum withdrawal may be better suited for your needs. Understanding the differences is the first step in making a loan decision that is best for you.
• Home Equity Loan (HEL) – A home equity loan lets you borrow a fixed amount in one lump sum, secured by the equity of your home. The loan amount you will qualify for will depend on your Loan to Value ratio, credit history, verifiable income, and payment term. These types of loans have a fixed interest rate, which is often 100% deductible on your taxes.
• Home Equity Line of Credit (HELOC) – A home equity line of credit is not so much a loan, but a revolving credit line permitting you to borrow money as you need it with your home as collateral. Applicants are typically approved based on a percentage of their home’s appraised value and then subtracting the balance owed on your existing mortgage. Things like credit history, debts, and income are also considered. Plans may or may not have regulations on minimum withdrawals and balances, as well as a variable interest rate.
Before tapping into your home’s equity, it’s important to weigh the pros and cons of each type of loan for your situation. Because your home equity line of credit and loan involves your most important asset – your home – the decision should be considered carefully. Is a second mortgage better than a credit card or a secured loan? If you’re not 100% sure, talk to a finance specialist before putting your home at risk.
The Pros and Cons of Buy Now Pay Later Deals
What is a Buy Now Pay Later Deal?
A buy now pay later deal is a type of agreement, where you pay for the purchase of an item with a loan, and then start making payments to clear your debt. This can be done instantly online or through the mail, using either cash or a credit card.
The origins of buy now pay later deals can be traced back to the 1800s in England. With these types of deals, customers could get their items on credit and then start paying off that debt with monthly installments.
The Benefits of Buying Now, Then Paying For It Later
Buying an item now and paying for it later is beneficial for those who have excess cash or savings. It offers a buffer of time in case the item is not worth the price tag.
This content will be used to generate leads and increase conversion rates by informing consumers about how they can purchase now and pay later without any interest charges.
The article will also discuss how this strategy can benefit businesses that typically sell items with a higher cost but still want to make sure that consumers are aware of the benefits of purchasing now and paying later on credit cards, debit cards, or additional billing.
Benefits: Low risk – since you are not risking your money upfront, a sale may not be lost if demand doesn’t meet expectations; Increased customer satisfaction
The Downsides to Buying Now, Then Paying For It Later
The downsides of buying now, then paying for it later:
- You will incur interest charges on the items you buy now to use later
- You are not saving money right away, but over time by getting a lower price on the items you buy now and then paying for them later.
- Eventually, you will pay too much in interest and still not have saved as much as if you had paid for the item in one lump sum.
- You may find that the smaller price is only temporary and that when your purchase comes up for renewal, it has gone up. This makes it so that you are never able to get a good deal anymore.
How to Avoid Overspending on Holiday Gifts & Save Money
How to Spend Your Money Wisely on Holiday Gifts This Year
Although the holidays are meant to be special and joyful, sometimes holiday budgeting can be stressful. It is common for people to find themselves scrambling for ways to save money during this time of year.
Some suggestions include:
-If you’re not spending money on yourself, consider giving your family members a break from gifts too.
-Shop online or go to a local store that offers discounts on products rather than splurging at a department store.
-Look into other community events that offer free or discounted food and drinks.
-Consider switching up your daily routine in hopes you’ll find some new activities you enjoy just as much as the ones you love now but don’t always have time for. Consider taking up yoga, cooking, volunteering with an animal rescue organization, or doing volunteer
Christmas is just around the corner and many people are planning for their Christmas shopping. The time for holiday shopping has come where you need to make sure that you get the best value for money.
Be smart with your money this holiday season. The holidays are a time to be generous but don’t go overboard. Use these tips to help you stretch your dollar and not feel too guilty about it.
Don’t spend more than you have:
- Be clear on what you can afford before shopping for gifts.
- Shop sales look for discounts and promotions before the holidays hit
- Offer to buy or make something for family members that they appreciate and would never buy themselves (i.e. handmade gifts).
How to Save Money on Holiday Shopping This Season
With the holidays just around the corner, we all need a little help with our holiday shopping.
Some ways to save money on holiday shopping this season include:
- Shopping around for sales and clearance prices
- Sign up for email notifications, where you can take advantage of online-only offers that aren’t available in store
- Check out stores like Costco, Sam’s Club, or BJ’s Wholesale Club to find low prices on gifts and items you may be looking for like electronics or toys
- Consider buying gift cards from your favorite retailer for someone else who will be able to use them
- Avoid buying items prematurely before the big day comes so that you don’t end up getting them later for less than half price!
Getting Pre-Approved for a Home Loan-The Ins and Outs
The process of obtaining a mortgage loan and purchasing a property is lengthy and involves a large number of steps. You’ll need to have the funds for a down payment on hand, as well as prepare your financial documentation for submission to your lender. You’ll need to ensure that your credit score is good enough to inspire confidence in your lender, and if it isn’t, you’ll need to begin improving it.
While finding a home that you and your family adore is a vital initial step in the home-buying process, it is far from the first. It’s critical to be prepared in today’s more competitive housing market. Unless you’ve been pre-approved for a loan, you may be disappointed if you locate a home you adore, even if it’s within your budget.
The first and most important step in purchasing a home is to conduct research. If you’re new to the process, you’re sure to have a lot of questions, such as what pre-approval entails and how it differs from actual approval. You may also be curious about the difference between pre-approval and pre-qualification, as well as the paperwork required. To assist you in your home purchasing process, we asked lending specialists to address some frequently asked issues about acquiring the mortgage for your dream home.
What is pre-approval, and how is it different than loan approval?
When you are approved for a loan, the lender will send you a commitment letter outlining the conditions of your mortgage agreement and loan, including the monthly payment and annual percentage rate on your loan. Additionally, you’ll learn about any conditions that must be met prior to the sale being finalized, such as obtaining homeowner’s insurance.
However, before you may obtain permission, you must obtain a pre-approval.
Consider the pre-approval process as an annual physical examination for your financial health. When you go through the pre-approval process, your lender will examine your income, credit score, assets, and obligations to determine whether you qualify for a loan and, if so, the maximum loan amount and monthly payment that you may qualify for. The specific documents you will need to submit and the loan amount you may qualify for will vary depending on your condition and the lending business you choose.
“Not all pre-approvals are created equal,” according to Peter Boomer, a PNC Bank mortgage official. “There are pre-approvals that demand little detail and simply a soft credit pull,” which is a brief examination of your credit history that does not temporarily decrease your score, “but do not require verification of critical buyer information.”
Consider that mild form of pre-approval as a means to run your financial status by the numbers. It may be beneficial if you’re just getting started in the home market and want to get a sense of what’s realistic for you. Once you have a feel of that, you can proceed with a more comprehensive pre-approval. “A full pre-approval is a more thorough examination of the buyer’s credit history and demonstrates the buyer’s ability to repay the mortgage, which includes a comprehensive underwriting evaluation of income, employment, and assets necessary for the down payment, as well as reserves,” Boomer continues. “This demonstrates to the seller that the prospective buyer possesses the financial resources to make the acquisition and has the mortgage in hand.”
Additionally to serving as a provisional promise from your lender when you find the proper home, Boomer notes that a pre-approved will expedite the rest of the process, including the eventual complete approval.
“Frequently, a pre-approval implies that the closing process can be accelerated, with only the appraisal and inspection remaining,” he explains. “Being pre-approved for a mortgage makes the bidder a more attractive homebuyer to the seller, which is critical in today’s competitive housing market when homes frequently receive multiple bids.”
What is the difference between pre-approval and pre-qualification?
While the terms “pre-approval” and “pre-qualification” are sometimes used interchangeably, they are not synonymous. Pre-qualification is a considerably simpler process than pre-approval.
You will be prompted to provide information about your income, debt, and the amount of money saved for a down payment, but this information will not be checked. Following that, your lender will inform you of the types of loans for which you may be eligible. Because there is often no obligation on either end, this is an excellent method for you to evaluate your lending company and see whether they are a suitable fit for you.
“One of the most beneficial things a prospective buyer can do—long before they begin touring homes—is to locate a reputable lender and obtain pre-approval,” says Ryan Dibble, COO of real estate company Flyhomes. “Pre-qualification provides an estimate of how much you can afford based on the information you provide regarding your down payment, assets, credit score, and income, and might reveal any barriers you may face in receiving your financing. Bear in mind that pre-qualifications are based on educated guesses.”
What about pre-subsidy?
The underwriting procedure is sometimes the longest and most stressful portion of the home buying process. This is when the lender will thoroughly vet your finances to ensure that everything is in order and that you are not at excessive risk. If you made any errors or omitted any critical information, the underwriting procedure is likely to trip you up.
If you choose a pre-underwriting method, you may begin this potentially lengthy process early and avoid any surprises down the road. This also makes you a more attractive prospect to homeowners looking to sell, since it demonstrates that you’re a safe bet and serious about concluding a sale.
“Getting pre-underwritten is the first step that all homebuyers should do to completely understand their budget, strengthen their offers, and ensure a smooth closing process,” Dibble explains. “With pre-underwriting, the lender thoroughly evaluates your ability to repay the loan before involving a property. Simply said, pre-underwriting is the only way to obtain an accurate response to a significant question: ‘how much can I spend on a home?’ It is a formal confirmation from a mortgage lender of the loan amount and program for which you are qualified.”
Dibble continues, “once pre-underwritten, you may purchase a home instantly and quickly close within 30 days in the majority of markets.”
When is the best time to obtain a pre-approval?
Once you’ve determined that you’re serious about purchasing a home, you should begin the process of obtaining a pre-approval before proceeding. If you decide to pursue a loan after finding a home that you like, you risk setting yourself up for disappointment.
“If you are considering homeownership, begin the pre-approval process immediately – even if you are thinking six to twelve months in advance,” advises Kim Chichester, Division Manager at Geneva Financial. “Do not go out looking at houses until you have been pre-approved. You are setting yourself up for disappointment or possibly the inability to make an offer on the home of your dreams in a timely manner.”
“What if you find the ideal home for sale for $400,000 only to discover that your maximum loan amount is $350,000?” adds Chichester. “No matter how many homes you inspect, none will ever compare. What if you are not pre-approved for a mortgage, find the home of your dreams, and the sellers will accept offers only from fully pre-approved purchasers until 6 p.m. that evening?”
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