Many members have asked us about Home Equity Lines of Credit (HELOC) and how they might benefit from using a line of credit based on their home’s equity. Here are answers to your basic questions about Home Equity financing and how St. Cloud Federal Credit Union’s service can benefit you and your family.
A1. A Home Equity Line of Credit is a form of revolving credit in which the equity in your home serves as collateral. A Home Equity line allows you to draw out money when you need it, without the need to visit the Credit Union. Use one of these convenient methods:
We want you to be aware of what’s involved in Home Equity financing, so we encourage you to talk to us about your specific needs. We will guide you through the application process. Much of the process can be completed over the phone; we would order a home appraisal OR ask that you bring your property tax statement. Final loan approval may be subject to other necessary verifications.
A Home Equity Line of Credit is a form of mortgage financing, so it requires closing costs, including such items as a title examination and appraisal. All or much of this amount may be recoverable through tax deductions for interest expense. See question 4 for more about deductions. All such out-of-pocket expenses in setting up a Home Equity Line will be paid by the member. Such costs may include appraisals, title report, recording fees, and the mortgage registration tax. Adequate property insurance must be maintained.
A2. When considering your qualifications for a Home Equity Line of Credit, Credit Unions and other financial institutions use the term “lendable equity”. Your lendable equity will vary, depending on how long you’ve lived in your home, and on other factors such as the amount of your mortgage down-payment, and whether you have made any home improvements which have added to the value of your home.
Generally, lendable equity is between 70% and 90% of your home’s current market value, after subtracting your mortgage debt.
A3. Generally, people use a Home Equity Line of Credit because it’s a convenient way to pay for major items such as education, home improvements and repairs,medical bills, emergency expenses, automobiles, even weddings. These expenses typically require more money than day-to-day expenses.
Some people may use it to consolidate all their bills into one monthly payment; usually, their monthly payment ends up less than the combined payments of all their bills.
A4. Depending on a person’s tax situation, the interest paid on Home Equity financing may be deductible. Always consult with a tax expert to determine what is eligible for deductions.
A6. Yes, you would need to pay off your Home Equity balance at the time you would close the sale of your home. A satisfaction of your mortgage would be sent to you, to be used at the closing of the sale.
Here is a list of terms used in lending, which may come up in conversations about Home Equity financing, as well as other types of consumer loans. To read the federal regulations regarding home equity financing, please click.
Annual membership or participation fee:
(Note: St. Cloud Federal members are not charged any annual fees, application fees, participation fees, nor transaction fees.) An amount that is charged annually for having the line of credit available. It is charged regardless of whether or not you use the line. Compare our plan to other lenders.
Annual percentage rate (APR): The cost of credit on a yearly basis, expressed as a percentage.
Application fee: (Note: St. Cloud Federal does not charge an application fee.) A fee that is paid upon application for a loan.
Balloon payment: A lump-sum payment that you may be required to make under a finance plan (loan) when the plan ends.
Cap: A limit on how much a variable-interest rate can increase during the life of the plan.
Closing costs: Fees paid at closing, including attorneys’ fees, fees for preparing and filing a mortgage, for taxes, title search, and insurance.
Credit limit: The maximum amount that you can borrow under the Home Equity plan.
Equity: The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.
Index: The base for rate changes that the lender uses to decide how much the annual percentage rate will change over time. St. Cloud Federal uses the monthly average of the 6-month Treasury Bill rate.
Interest rate: The periodic charge, expressed as a percentage, for use of credit.
Margin: The number of percentage points the lender adds to the index rate to determine the annual percentage rate to be charged. The margin used by St. Cloud Federal is 4.5 percent over the index rate. Frequently, our actual APR is lower than the calculated rate.
Minimum payment: The minimum amount that you must pay (usually monthly) on your account. The minimum allowable payment may be “interest only”. In other plans, the minimum payment may include principal and interest.
Points: A point is equal to one percent of the amount of a credit line. Points usually are collected at closing, and are in addition to monthly interest. St. Cloud Federal Credit Union does not charge for points on Home Equity financing.
Security interest (collateral): An interest (item of value) that a lender takes in the borrower’s property to assure repayment of a debt.
Transaction fee: St. Cloud Federal Credit Union does not charge any transaction fees.
Variable rate: An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
Call or visit our Loan Department to learn more about the benefits of Home Equity financing — (320)258-2190 or toll-free 1-888-252-2634
Email our Loan Department at Lndept@stcloudfcu.coop