Connect with us

Credit Cards

Home Equity Loan vs. Line of Credit: What’s the Difference?

Published

on

couple talking to real estate agent about their home financing options

A home’s equity is a key advantage of owning a home. However, you can only access it when you sell your home or take out a home equity loan or a home equity line of credit (HELOC).

Using either a loan or line of credit can be helpful if you need to access a sum of money with favorable rates or low fees. There are some key differences to consider when it comes to choosing which one is best for you. Take a look at our guide below to learn about the differences between both home equity loans and home equity lines of credit.

Home Equity Loan vs. Line of Credit 

Here’s a quick definition of each option:

A home equity loan is a lump sum of cash that is repaid with fixed payments during a set period.

A home equity line of credit is a flexible loan that allows you to borrow and repay multiple times up to the maximum amount agreed on by the lender, similar to a credit card.

There are a handful of similarities between these options:

  • Collateral: Your home is used as security for lenders in the event you cannot pay back the loan.
  • Equity: Both options borrow against the value of the home that you actually own, known as your home’s equity. We’ll go into more detail about how to calculate this later.
  • Second mortgage: These options are commonly referred to as second mortgages since you’re borrowing against the value of your home.
  • Tax deductible: The IRS says that interest payments for either option are potentially tax deductible if the loan is used to improve or remodel your home.

Here are the key differences between both:

Home Equity Loan Home Equity Line of Credit
Funds Borrow up to the
credit limit
Given a lump sum upfront
Interest Typically a variable rate Typically a fixed rate
Payments Only make payments based on the amount borrowed Fixed payments during
a set time

Calculating Your Home’s Equity

You can determine your home’s equity by subtracting the amount you currently owe on your mortgage from the value of your house.

Another number you’ll need to know is your combined loan-to-value (CLTV) ratio. This is a percentage found by dividing the total amount you owe on all home loans by your home’s market value. The lower your CLTV, the lower your credit risk and higher your chances are for receiving the loan. 

how to calculate compuond loan-to-value ratio

The amount you’re able to borrow against your equity greatly varies between lenders. For example, Discover offers loans up to 95 percent of your combined loan-to-value ratio. On the other hand, some lenders put a cap on the total amount you can borrow. U.S. Bank, for example, allows customers to borrow $750,000 and up to $1 million for California properties.

You can sometimes borrow more in exchange for higher costs and/or interest rates.

Example

Let’s assume that you meet a lender’s income level, credit score and other requirements for a second mortgage. For this example, let’s also assume the following:

  • Home loan debt: $200,000
  • Home’s worth: $600,000
  • CLTV ratio (home loan debt divided by home’s worth): 33 percent
  • Lender allows a CLTV of 90 percent

With these numbers, we can find the maximum debt amount and the amount you can borrow. The maximum debt amount is the total amount a lender would loan you based on your home’s value. The amount you can borrow is the sum they will lend based on what you currently owe.

  • Maximum debt amount (multiply home’s worth by 90 percent): $540,000
  • Amount you can borrow (maximum debt amount minus current home loan debt): $340,000

Keep in mind that lenders can foreclose your home if you default on the loan since you’re using your home as collateral. Make sure the amount you borrow is a total you’re confident you can repay.

Home Equity Loans Pros and Cons

Home equity loans are a consistent option that can make it easier to predict your monthly budget. They’re also great if you need funds upfront for a large expense. However, you can end up paying a lot, especially in the beginning, since you are paying interest on the entirety of the loan.

Pros

The biggest benefit of a home equity loan is its predictability. Below are a few other benefits to using home equity loans.

  • In some instances, a fixed interest rate
  • Fixed monthly payments
  • Set payment period
  • It’s an amortizing loan, meaning that payments reduce the loan balance and cover some interest costs

Cons

Home equity loans fall short in their inflexibility and potentially high long-term costs. Here are a few other drawbacks to consider.

  • High interest costs in the beginning since you’re borrowing a large sum
  • May pay more than your home is worth if your home’s value goes down over time

When You May Use a Home Equity Loan

A home equity loan may be a good option for those who have large one-time expenses like a home renovation project.

Some also use a home equity loan to wipe out a large amount of debt since it’s sometimes more affordable to get a large lump sum like this using a home equity loan compared to other loans. However, its affordability in comparison to other options is heavily reliant on an individual’s financial situation.

This option is also great for borrowers who prefer consistent terms and want a predictable payment plan. 

home equity loans are predictable options best suited for expenses with defined costs

HELOC Pros and Cons

HELOC’s are flexible options that allow you to borrow only what you need when you need it instead of dispersing the entire amount, similar to a credit card. This way, you only pay interest on what you borrow, but have variable interest rates as a result.

A major difference to note between home equity loans and HELOC’s is that HELOC’s typically have a “draw period” and a “repayment period.”

  • The draw period is the time a borrower can access the funds. They’re able to continually borrow and repay during this time, up to the maximum allowed amount. During the draw period, borrowers are required to pay at least the monthly minimum payment.
  • The repayment period immediately follows the draw period. This is the time borrowers are required to pay back the outstanding balance.

Pros

HELOC’s are great for those who want more flexible payment options. There are a few other benefits to consider with this option.

  • Borrow only what you need
  • Pay interest only on what you borrow
  • Some offer a fixed-rate loan option that allows borrowers to convert variable-rate HELOC balances into a fixed-rate option
  • Some offer options to delay the repayment period
  • Some offer interest-only periods that allow borrowers to pay only interest for a fixed time
  • Borrowers can keep interest costs low if they carry a small or zero balance

Cons

Variability with HELOC’s comes at a price—you may end up paying higher interest rates depending on when and how much you borrow. Get familiar with other HELOC drawbacks.

  • Interest rates can fluctuate based on the market and result in higher interest debt
  • Flexible borrowing may entice some to overspend
  • May need to meet minimum withdrawal amounts and other requirements to borrow
  • Lenders can lower or close your HELOC

When You May Use a HELOC

This option may be more appealing for those with expenses that occur in stages. For example, you may have a long-term home improvement project, but are unsure how much each phase of the project will cost. 

It’s also an option for things like college tuition when you don’t know how much aid you’ll receive from other financial sources. With HELOC’s, you have the flexibility to only borrow what you need.

HELOCs are also great for borrowers who don’t want to be locked in to a long payment plan and don’t want to initially borrow more than what they might need.

home equity lines of credit are flexible options that work well for expenses with variable costs

Other Factors to Think About

Do your research when comparing these offerings with each other and other options to ensure you’re making an informed decision. Here are just a few things to consider:

  • Interest rates: Although second mortgages generally offer more favorable rates than other loans, the amount lenders offer can vary. This variability increases if you choose a HELOC.
  • Fees and penalties: Expenses like closing costs and appraisals can drive up the initial cost of taking out either option.
  • Foreclosure risks: Both options put you at risk of losing your home if you’re unable to pay back what you borrow. 
  • Owe more than your home’s worth: You may end up paying a lot more than what your home’s actually worth, depending on market fluctuations and the loan type. Home equity loans may result in higher interest debt since your rate is locked in from the beginning. If you need to sell your house while you’re using either second mortgage option, you may end up owing more than your home’s worth or end up upside-down on your loan.

You should also consider other types of loans and financing options depending on your needs and financial standing. Work with a trusted mortgage provider or financial provider to help guide you through your decision.

If you find that your credit score is holding you back from the options you want, you can take a look at these tips for securing a loan with bad credit. If you were in the market for a loan because you’re having trouble keeping up with payments, you can also consider refinancing your mortgage.

Refinancing a mortgage with bad credit is possible, it’s just a bit more complicated than refinancing with good credit. When you’re shopping around for any loan, make sure to read the fine print, do your research and explore all of your options before making a decision.

Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Credit Cards

Understanding Credit Card Security Codes

Published

on

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Credit card security codes are an important security measure to prevent fraud and identity theft. They add an additional layer of safety when making purchases and help ensure the buyer is, in fact, the cardholder.

These security codes—often called CVV codes, short for “card verification value”—are three- or four-digit codes located directly on your credit card. They’re typically, but not always, asked for when making card-not-present transactions, such as those made online and over the phone. Here, we detail where to find them, how they work and why they’re important for consumer protection.

Where to Find Your CVV Code

The location of your CVV code depends on the credit card issuer:

  • Visa, Mastercard and Discover: The code will be three numbers on the back of the card to the right of the “authorized signature.”
  • American Express: The code will be four numbers on the front of the card above and to the right of the card number.
Where to locate your card's security code.

How to Find Your CVV Code Without the Card

Credit card security codes were designed to ensure that the person making a purchase actually has the card in their possession. Because of this, it’s impossible to look up your CVV code without having the physical card. This is why it’s important to have the physical card on hand if you need to make a purchase that requires a CVV code.

If an identity thief obtains your credit card number—for example, via shoulder surfing—may try to call the bank and pretend to be you in order to get the CVV code. However, banks typically don’t give out this information. Each financial institution has their own policies, but if you can’t read or access your CVV code, they will usually issue you a new card.

While most retailers require a CVV code when making card-not-present transactions, many don’t. In these instances, crooks would still be able to use your card.

How Are CVV Codes Generated?

According to IBM, CVV codes are generated using an algorithm. The algorithm requires the following information:

  • Primary account number (PAN)
  • Four-digit expiration date
  • Three-digit service code
  • A pair of cryptographically processed keys

Other Names for CVV Codes

Depending on the credit card company and when your card was issued, your security code may go by a different name. Even though there are many different abbreviations, the basic concept remains the same. Below are all the abbreviations and meanings for credit card security codes:

  • CID (Discover and American Express): Card Identification Number
  • CSC (American Express): Card Security Code
  • CVC (Mastercard): Card Verification Code
  • CVC2 (Visa): Card Validation Code 2
  • CVD (Discover): Card Verification Data
  • CVV (All): Card Verification Value
  • CVV2 (Visa): Card Verification Value 2
  • SPC (Uncommon): Signature Panel Code

Credit Card Security Code Precautions

While CVVs offer another layer of security to help protect users, there are still some things to be aware of when making card-not-present transactions.

  • Sign the back of your credit card as soon as you receive it.
  • Keep your CVV number secure. Never give it out unless absolutely necessary—and if you fully trust the person.
  • Review each billing statement to ensure there are no transactions you don’t recognize or didn’t authorize. If there are, contact your financial institution immediately and consider freezing your credit.
Credit card security precautions.

Protecting your identity requires constant vigilance—but emerging technology may have the potential to mitigate some of the risk of credit card fraud.

Shifting CVVs: The Future of Credit Card Safety?

Since chip-enabled cards replaced magnetic stripes, in-person credit card fraud has taken a big dip. Crooks are turning toward online and card-not-present methods of fraud. CVV codes are good at combating this type of fraud—but shifting CVVs, also referred to as dynamic CVVs, may be even better.

The technology works by displaying a temporary CVV code on a small battery-powered screen on the back of the card. The code regularly changes after a set interval of time. This helps thwart fraud because by the time a hacker has illegally obtained a shifting CVV code and tried to make a purchase, it will likely have changed.

Despite the security benefits, shifting CVVs haven’t been widely implemented due to high cost, and it remains to be seen if the technology and process can scale. Financial institutions have many measures in place, such as fraud alert, to notify you of potentially suspicious activity.

If you suspect you’ve been a victim of identity theft, call your credit card company, change your passwords and notify any credit bureaus and law enforcement agencies. By regularly checking your credit card statements, being careful about who you give your information to and being vigilant when making purchases, you’ll help do your part in keeping your identity secure.


Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.

Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source link

Continue Reading

Credit Cards

How Do Credit Card Miles Work?

Published

on

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Credit card miles are rewards points that help you earn credits toward travel and other purchases. How credit card miles work and whether this type of rewards card might be a good idea for you depends on a few factors, which we’ll cover below.

What Are Credit Card Miles, and How Do They Work?

Credit card miles are similar to credit card points. They’re a reward that you earn by taking certain actions, including making eligible purchases with the card.

Once you earn enough miles, you can redeem them for rewards. They’re called miles because typically these types of rewards credit cards are aligned with an airline or travel service. That usually means the most value comes from redeeming miles for airfare or rewards miles in an airline program.

However, you can often choose to redeem them for other rewards, such as merchandise, hotel and other travel credits or gift cards at a lesser value per point.

How Are Credit Card Miles Different From Frequent Flier Miles?

In some cases, credit card miles and frequent flier miles may be the same thing. If you have an airline-branded card, such as a Delta SkyMiles credit card, your points may be in the form of the airline’s frequent flyer miles. You can redeem those for flights or other rewards within the frequent flyer program.

If you have a non-branded card, then you may earn generic credit card miles. Those may be redeemed for flights with numerous airlines or other rewards, typically via the credit card rewards program’s online portal.

Hotel rewards cards work in a similar manner. If it’s a branded card, you may earn rewards directly via the hotel chain’s membership rewards program.

How Do You Earn Credit Card Miles?

The exact way you earn credit card miles depends on your card. But typically, you can earn by spending with your card to qualify for various rewards.

Use Your Credit Card Often

Rewards cards are designed to promote spending. You usually earn a certain number of miles or points for every dollar you spend on qualified purchases. In some cases, you can earn more by spending with certain retailers or on certain categories.

For example, it’s common for an airline-themed card to reward more for spending in travel categories. You might earn 3x miles or 5x miles for every dollar you spend with a certain airline, for example, and one mile per dollar on all other purchases.

The key to earning a lot of miles is using the card as much as possible for things you would already be buying and then paying the balance off immediately so you don’t owe interest. For example, if you earn two miles per dollar spent at grocery stores, you could use your credit card to cover your grocery shopping each week.

If you spend $200 a week, that’s roughly 1,600 miles earned per month just for doing grocery shopping you already do.

Take Advantage of Sign-Up Bonuses

Many rewards cards come with sign-up bonuses, and this is a great way to earn a lot of credit card miles right from the start. Typically, the bonus requires you to spend a certain amount of money when you first open the card.

For example, you might earn 50,000 miles if you spend $5,000 in the first three months as an account holder. That sounds like a lot, but it’s often achievable just by using the credit card to cover all normal expenses, such as fuel, groceries and even utility bills. Just make sure you’re paying off the card balance regularly so you don’t end up with a high utilization rate and expensive interest.

Refer Your Friends

Some credit card rewards programs offer extra miles if you refer friends. If your friend applies for the card using your referral code and is approved, then you may be awarded extra credit card miles.

How Much Are Credit Card Miles Worth?

The value of credit card miles varies, but typically they’re worth about one cent. That means if a flight costs $400, you need 40,000 miles to cover it. In some cases, you may be able to raise the value of your miles by redeeming them through a select online portal or via certain airlines.

Redeeming Your Miles

Follow the general steps below, as well as any unique instructions from your credit card company or rewards program, to redeem miles.

Check Your Balance

First, find out how many miles or points you have. This is typically listed on your last statement, but most credit cards support online account access where you can get up-to-date information about your points. You can also call your credit card company or rewards customer service line to find out.

Understand the Limitations

Before you plan on using miles to pay for travel, look at the fine print to understand restrictions. Some rewards programs have blackout dates, which means you might not be able to use miles to pay for airfare during peak times. Others require mile minimums, which means you need a certain amount of miles to redeem to cover part or all of your airfare.

And miles do expire, so make sure you keep track of when you earned the miles and when they will expire so you can redeem them beforehand.

Have a Flexible Schedule

Being flexible about when exactly you travel can also help you get the most out of credit card miles. For example, in some cases you can save hundreds on airfare by leaving a day earlier or later than planned. That means your miles can stretch further to cover more trips or tickets.

Choosing the Best Card for You

Earning and using credit card miles helps you boost your spending power. With the right credit card, you’re getting more than your original purchase when you buy things. But you do need to stick to recommended credit card use, such as paying off your bill every month and keeping your balance as low as possible.

Otherwise, you could end up paying high interest rates or driving down your credit score, and the miles you might earn in the process are not valuable enough to make up for those costs.

Which card you should get depends on your personal needs and preferences. Popular options include the Chase Sapphire Preferred Card, the Bank of America Travel Rewards card and the Capital One Venture Rewards card. These are unbranded cards that let you earn general miles.

If you fly regularly with a certain airline, you might be able to maximize value from a branded airline rewards card. Most rewards credit cards do require good or excellent credit. Check your credit before you apply so you know what cards you might qualify for.

And if you find anything inaccurate on your credit report that could be dragging down your score, reach out to Lexington Law for information on how we can help you dispute errors on your credit.


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source link

Continue Reading

Credit Cards

Subsidized vs. Unsubsidized Loans – Lexington Law

Published

on

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

The federal direct loan program offers subsidized and unsubsidized loans to college students. A federal direct subsidized loan is a loan where the government pays the interest while the student is in school. A federal direct unsubsidized loan is one in which the student is responsible for paying all interest, receiving no additional federal aid.

What Is the Difference Between Subsidized and Unsubsidized Student Loans?

The main differences between federal direct subsidized and unsubsidized loans are the qualification criteria, the maximum limits and how the loan interest works.

A chart displaying the differences between subsidized and unsubsidized student loans.

Loan Qualifications

Subsidized: To qualify for a subsidized loan, you must be an undergraduate student who can demonstrate financial need based on the information you submit through the Free Application for Federal Student Aid (“FAFSA”).

Unsubsidized: Unsubsidized loans are available to both undergraduate and graduate students, and there is no requirement to demonstrate financial need.

Maximum Loan Limits

Subsidized: Your school will determine exactly how much you can borrow each year, but there are federal limits. These limits are based on what year of school you are in and whether you file as a dependent or an independent. Subsidized loan limits tend to be lower than unsubsidized limits. The aggregate limit for an independent student with subsidized loans is $23,000.

Unsubsidized: Unsubsidized loan limits tend to be higher than subsidized loan limits. The aggregate limit for an independent student with unsubsidized loans is $34,500.

How Interest Accrues

Subsidized: The U.S. Department of Education pays the interest for subsidized loans as long as the student is enrolled in school at least half-time. They will also pay the interest during your grace period—defined as the first six months after leaving school—and any period of deferment. This means that the amount of the loan will not grow once the student graduates, since the government has been paying the interest.

Unsubsidized: Whether you’re an undergraduate or a graduate student, you’re responsible for paying all of the interest during the entire life of your unsubsidized loan.

What Are the Similarities Between Subsidized and Unsubsidized Student Loans?

When it comes to interest rates, fees and the “maximum eligibility period”—the amount of time you’re able to take out loans—subsidized and unsubsidized loans are virtually the same.

Fees

On top of interest, you can expect to pay a small fee for both types of loans. This is approximately 1.06 percent of your total loan amount, and it is deducted from each loan disbursement. 

Both subsidized and unsubsidized student loans have a fee of 1.06% of the total loan amount.

Undergraduate Interest Rates

The interest rates for both subsidized and unsubsidized loans for undergraduate students are the same. Currently, the rate is at 2.75 percent for loans first disbursed from July 1st, 2020, to June 31st, 2021. The one exception is for direct unsubsidized loans for graduate students, which have an interest rate of 4.30 percent. 

Maximum Eligibility Period

For both loan types, the time in which you’re eligible for your loans is equal to 150 percent of the time of your program. For undergraduates pursuing a four-year bachelor’s degree, this means they will be eligible for their loans for six years. Those pursuing a two-year associate’s degree will be eligible for three years. This ensures that students can still receive loans even if they’re unable or choose not to graduate within the program’s time frame. 

How to Apply for Subsidized and Unsubsidized Loans

Once you’re ready to apply for a federal direct loan, fill out the FAFSA. Your school will send you a detailed report of what student aid you’re eligible for. Any grants or scholarships are free money, so make sure to accept them. They’ll also decide which loans you’re eligible for, the amount you can borrow each year and what loan type you can get—subsidized or unsubsidized. 

No matter what type of student loan you go for, it’s important to understand how they affect your credit so that you can set yourself up for financial success after graduation. With responsible, on-time payments, you’ll be well on your way to healthy credit for life.


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source link

Continue Reading

Trending