There’s a lot that goes into being a homeowner. On top of the day-to-day and month-to-month obligations and maintenance that go into owning a home, managing your home’s value is one of the biggest financial responsibilities you’ll ever have.
This is especially true as you grow older, have a family, and/or approach retirement!
While this may feel like a large burden, Cornerstone Bank can help. We believe in providing every resource available to our customers, including home equity lines of credit in Kansas City.
What is a home equity line of credit?
A home equity line of credit, which we also refer to as a HELOC in the banking community, is a means of opening a line of credit, using the value of your home/mortgage as collateral.
A line of credit is sometimes also called a “revolving loan.” It acts similarly to the function of a credit card.
Common uses of a home equity line of credit in Kansas City
One of the most common reasons someone would borrow against their home using a home equity line of credit is to make updates to their home in order to increase its value.
This is especially true if you’re working on a “fixer upper” home that needs many small improvements, such as updating old faucets, permanent lighting, doors, put on a new roof, install new windows, or finish a basement..
For homes that are simply outdated, updating the kitchen and bathroom(s) of a home is one of the first tasks new homeowners take on to increase the value of their home.
In either scenario, a HELOC would allow you to borrow money when you need it to do these improvements, and make payments back later at a similar interest rate to your mortgage.
Other common uses of a HELOC include:
- consolidating or paying down debt or other loans
- keeping an emergency fund
- using as a down payment on another home
- refinancing a mortgage or existing HELOC
- Making a purchase, such as a new car
Read more: “Can I use home equity to pay off debt?” →
The breakdown of how HELOCs are used today—
It makes a lot of sense, then, that homeowners would be tempted to “cash in” on the opportunity for a little extra funding for their next endeavor. However, there are a variety of reasons why you may want to use caution when considering a HELOC.
Read more about How to Use Home Equity in Kansas City →
Here’s how not to use a home equity line of credit in Kansas City
While using a HELOC may be helpful for paying down your own debt, you should avoid using it for expenses for others, such as your children.
It may be tempting to use the value of your home to help secure student loans for kids going away to college. However, banks widely and strongly advise you find other means of paying for school. This may mean encouraging your kids to take out their own loans.
This is because the life of a student loan is incredibly long. Its payments could stretch well into your retirement, leaving you with less available funds for your own lifestyle, whereas your child will have much more time to pay off their debt on their own.
Why use a HELOC instead of a traditional credit card or loan?
HELOC versus credit cards
The primary benefit of taking out a home equity line of credit on your home is that your line of credit, or amount you are able to borrow at once, is much higher.
According to an independent research firm, Americans with good to exemplary FICO scores have an average credit limit of $5,209 to $9,543, respectively.
Compare that to a typical HELOC of between $30,000 and $50,000 and you’ll see why many choose to use a home equity line of credit for certain financial needs.
Additionally (with a good credit score) you may be able to take advantage of very low interest rates on this higher credit limit, for which credit cards stand no chance.
HELOC versus personal loan
You do not need to claim collateral on a personal loan. However, you may receive much better *tax benefits by using a HELOC—especially if you’re using that money to make improvements to your home.
Another benefit of using a HELOC is that the loan is “revolving.” (Rather than receiving a lump sum on which you must immediately begin making payments.) So while you may end up borrowing more over time than a personal loan, the payment process may end up being much more manageable with a HELOC.
I’ve heard of a “home equity loan.” What is that? Is it the same thing as a second mortgage?
HELOC versus home equity loan
Similar to a personal loan, a home equity loan functions as a lump sum payment. It uses your home as collateral, which means you could score a much better interest rate than a personal loan.
With a home equity line of credit, however, you have much more flexibility in payments. Firstly, you will only need to pay interest on the amount you draw from the HELOC. Secondly, you will have the option of making interest-only payments, which may speed up the payoff process down the road.
How to shop for a home equity line of credit in Kansas City
Have you decided that a home equity line of credit is the right fit for your financial needs? Next, you should understand the process of how to shop for a home equity line of credit in Kansas City.
Here’s what to do next.
1. Understand how much you will feasibly be able to borrow.
First, you’ll need to ensure that your home has equity; meaning, your mortgage must be less than the value of the home.
Typically, banks advise that you don’t borrow more than 80% of your home’s value. To calculate the percentage of loan to value, subtract the amount you owe on your mortgage from the appraised value.
As with all loans, you should do your research, have a good grasp on the scope of your finances, and take into account how much of a loan amount you will be able to responsibly handle. Don’t forget to keep in mind your monthly and yearly expenses.
2. Look for the best interest rates & perks on home equity lines of credit in Kansas City
There are two types of interest rates on a HELOC: variable and fixed.
A variable interest rate will change from month to month and follow market trends. This rate is calculated by an index (the U.S. Prime Rate, published in The Wall Street Journal each month), and a margin, which is constant.
When calculating your HELOC payments using variable interest, the bank will provide you with a minimum payment amount that includes both principal and interest.
A fixed interest rate is more predictable and may protect you from getting any surprises. However, it may also prevent you from earning a lower interest rate if the market is good and/or your credit improves.
You may also encounter specific fees in regards to your HELOC. Banks can charge any number of fees for the following reasons:
- Application Fee
- Early Account Closure Fee
- Cancellation Fee
- Annual Fee
- Closing Costs
The bank in which you have your mortgage may be the best place to start when looking for a home equity line of credit. We love being able to expand our relationship with our customers and help them in as many ways as possible!
3. Learn how to apply for a HELOC
There are a few other things you’ll need to get your HELOC started than just proof of equity.
Like when you applied for your original mortgage, lenders will also assess and consider:
- your credit score and credit history
- employment history
- monthly income and monthly debts
- & other factors that may influence your ability to pay back the HELOC
Be sure to bring the following documents when you visit Cornerstone Bank to help us have the most productive conversation we can.
- Two years of W-2s or tax returns
- Your most recent pay stub which includes the year-to-date income amount
- Bank statements & other asset statements
- Debt records, including credit cards & any other existing loans you’ve already taken out
Once you get through these three steps, it’s time to enjoy more financial freedom with your new home equity line of credit in Kansas City!
Look to Cornerstone Bank for banking advice, insights, and more.
We are dedicated to the Kansas City community and have been in business for over 17 years. The relationships we form with customers are highly valued and we strive to provide excellent service above all else.
Have any additional questions we can answer about home equity lines of credit in Kansas City? Let us know how we can help.
*Please consult a tax advisor regarding the deductibility of interest.