When we started working with a financial advisor a few years ago, there were very few things that surprised me.
Since we’d already created a financial plan without an advisor, I had my savings goals all set up, my plan of attack, and everything was feasible given our financial situation.
Where we had holes was in our system overall because I didn’t have a full picture of what we needed and, honestly, had no one pushing me to do them. The best example was our estate plan – we didn’t have one! In the years since our first few meetings, it’s something we’ve checked off our list and taken care of.
Another example of this was opening a home equity line of credit for financial flexibility. I had no reason to get one – I wasn’t consolidating debt, I wasn’t planning a major home improvement, and so without those very common use cases, I never thought about it.
So when our advisor suggested it – I wondered why? It’s so you have access to the credit even if there’s no immediate need. If one appears, it’s there and you don’t have go through the process.
What is a Home Equity Line of Credit?
A home equity line of credit (HELOC) is a line of credit where the collateral is the equity in your house. It’s not a loan and you don’t get a lump sum. You simply have access to this line of credit.
A few terms to know when it comes to HELOCs:
- Draw period: How long the line of credit is available – so if you have a 10 year draw period you can draw on the LOC over the course of 10 years. During the draw period, you only pay interest on what you borrow – you don’t have to pay down the principal. If you do, you get access to that credit again.
- Repayment period: The period after the draw period, where you can’t borrow anymore and now the HELOC is like a regular loan. The interest rate is fixed now.
Our advisor recommended it because it gives you additional financial flexibility if you ever need a large sum of money. Many people use it to consolidate debt, since the HELOC interest rates are going to be lower than most other interest rates, or use it to make home improvements, pay medical bills, or for education.
What separates a HELOC from a loan is that you only pay interest on the sum you borrow. If you have a $10,000 HELOC but borrow none of it, you pay no interest.
A HELOC isn’t free though – it’s like getting a loan but a lot of banks, like Capital One, do not charge a closing cost fee. That's huge.
There is an annual fee, unless prohibited by state law, and an early termination fee if you close it within a certain number of months (like 36 months), again unless prohibited by law. All banks will charge this fee and it varies but usually around $50-$75 for the annual fee and $400-500 for the early termination fee.
Let’s See Some Numbers
I went to Capital One’s Home Equity calculator, one of the brand’s tools that help you choose the right option for your situation, to get a quick estimate of how much it would cost to open one up (all numbers are accurate as of November 2nd, 2016).
In Maryland, if you have a $300,000 home with a mortgage balance of $150,000 (so equity of $150,000), you can get a HELOC with a limit of up to $90,000 with an interest rate as low as 3.20% variable APR. Learn more here.
That’s what this easy to use, simple tool tells me. I can find this all without putting any personal information, which is convenient.
To get a more accurate interest rate, I will need to enter more information so they can check (though thanks to how Capital One does the inquiry, it will not affect my credit score).
$50,000 HELOC for a 760+ FICO = 4.49% variable APR
If you click on Get Started on www.capitalone.com/home-equity, you can get an even more personalized quote and rate. That’s when you’ll enter your personal information, including social security number, and Capital One will begin the process of checking your credit (again, it's a soft pull so it won't affect your credit score). There’s no application fee and if you open a HELOC, no closing costs, so the only cost is the $50 annual fee. For more, click here.
(On an unrelated note, having never done this before I thought this type of thing would be complicated — it seems remarkably easy. I love the internet!).
I don’t plan on using it unless I need it, so I see no obvious downsides. For $50 a year, I have access to a $50,000 line of credit with a reasonably low interest rate (that I don't pay unless I actually borrow money).
Seems like a useful financial tool. What do you think? Am I crazy?
Of course, you can also apply for a home equity loan if you’re remodeling your home or consolidating debt, and Capital One has some tools that’ll give you the knowledge to choose the right options for your situation. It's different than a line of credit because with a loan you get the whole sum, which makes sense if you know how much you need. If you want to give their tools a look, go to www.capitalone.com/home-equity. You can also call 855-446-9656 or stop in a branch for more information if you prefer to talk to a person.
This post was sponsored by Capital One but the words and thoughts are my own.