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Pros and cons of a home equity line of credit

Homeowners who want to tackle major home renovations or consolidate high-interest debt can tap into their home’s equity and take out a home equity line of credit (HELOC). Unlike home equity loans, which offer a lump sum, HELOCs are a revolving line of credit. You can borrow funds whenever you need them—similar to a credit card. You’re given a maximum borrowing amount based on the equity in your home—typically up to 85% of your home’s value minus any remaining mortgage payments. If this applies to you, below are four pros and cons to taking out a home equity line of credit.

Pros of a HELOC

Little to no closing costs

Closing costs for HELOCs are lower than what it costs to close a mortgage, as loan sizes for HELOCs are smaller than a standard mortgage. Closing costs for HELOCs typically run between 2% to 5% of the total line of credit and consist of origination fees, underwriting fees, and other administration fees. Depending on your lender, some of these costs are reduced or eliminated. For example, some lenders may waive origination fees or offer no cash due at closing.

Lower interest rates plus tax benefits*

Interest rates are already low, but HELOC rates are lower than common lending avenues, like personal loans and credit cards. Interest rates for personal loans range from 6% to 36% depending on credit score and financial history, and credit cards average around 16%. Meanwhile, some of the best HELOC rates fall below 5%. Interest can also be tax-deductible*, but there are restrictions. The Tax Cuts and Job Act of 2017 made several changes to individual income tax, including reforms on itemized deductions. But, interest paid on HELOCs can be deducted, only if the loan makes improvements on the taxpayer’s home used as collateral—and it must be their main home. Interest is not tax-deductible when used to pay off personal living expenses, like credit card debt.

Financial flexibility

HELOCs offer tons of financial flexibility. Depending on the amount borrowed, repayment periods are often longer, making them ideal for big-ticket projects or expenses. The timeline varies, but some lenders offer terms up to 30 years. And, you only have to make interest payments during the draw period, which is usually the first five to ten years of the loan’s lifetime. When the draw period ends, you begin making payments on principal and interest. You have the option to pay the principal amount, too, to lower the amount remaining during the repayment period.

Fewer restrictions on how you use funds

There are few restrictions on how you can use HELOC funds. Many people use HELOCs to pay for major renovations. Even though HELOCs are secured by your home, you don’t have to use them for remodeling. Sometimes, it can be beneficial to use HELOCs to pay off personal expenses because of their lower interest rates. For example, HELOCs can be used to consolidate debt, pay off substantial medical expenses, or help pay for tuition—to name a few.

Cons of a HELOC

Your home is collateral

Unlike credit cards or personal loans, which are unsecured, HELOCs are secured, which means a form of collateral is required to borrow funds. Secured loans often have lower interest rates but assume some risk. The upside of your home being used as collateral is that the more equity you’ve built, the more you’re capable of borrowing. The downside of your home as collateral is if you’ve missed a few loan repayments, unfortunately, your home could be subject to foreclosure.

Your home’s equity is reduced

As previously mentioned, HELOCs involve borrowing from your home’s equity. When you build equity and can borrow what you need, it’s beneficial. However, if housing prices decrease and the value of your home drops, this could lead to you owing more than what your home is worth. And, if you owe more than what your home is worth, this reduces your borrowing capability.

Variable interest rates

Unlike home equity loans, which offer fixed interest rates, HELOCs offer variable interest rates. The interest rate fluctuates over time—usually at the mercy of the Federal Reserve. The Federal Reserve is responsible for setting the rates that banks charge each other for overnight loans to meet reserve requirements. The prime rate is another benchmark rate and the most commonly used determinant of HELOC rates. The prime rate is typically 3% higher than the federal fund rate, and lenders use this to set their rates. When the Federal Reserve changes the federal funds rate, other loan rates increase or decrease.

Possibility of overspending

Unfortunately, HELOCs are not interest-only payments forever. During the draw period, you’re required to make interest payments. It can be easy to forget how much you owe, especially when you have a draw period of ten years. When the draw period is over, you begin paying the principal amount of your loan, plus interest. If you’re not anticipating or accounting for the increase in monthly payments when your draw period ends, it can come as a financial shock.

Although it involves significant consideration, HELOCs can be a viable option if you have enough equity built in your home due to their flexibility and potential tax benefits. But, using your home as collateral can be intimidating for some. Examine your financial habits and see if a HELOC works for your situation. And remember, Georgia’s Own is here for your lending needs, with ReadiEquity LOC rates as low as 4.00% APR through August 31st.**

*Please consult your tax advisor.

**Rates are variable and subject to change. Your Annual Percentage Rate (APR) may differ from the one shown and will be based on your credit worthiness and loan to value. Rate may not exceed 18% at any time. Property and/or flood insurance may be required. Terms, rates, and conditions are subject to change without notice. 

Free ways to check your credit score

Are you the kind of person who loves to keep up with your credit score, or do you prefer it to come to you as more of a surprise (which we don’t recommend)? Either way, you will have to know your credit score at some point in your life, and it’s better to be prepared for that day. We know you’re on a budget, so here are some ways you can track your credit score for free.

Understand how it works

Before you check your credit score, you need to know how your score is determined. Your score is based on a number of factors: how much debt you owe, the status of debts you have paid in the past, the length of your credit history, and a few other things. Basically, your credit score is a snapshot of how reliable you are when it comes to paying back money you have borrowed. For example—if you currently have a lot of debt, your credit score may be lower, even if you have consistently repaid loans in the past.

Why does my credit score matter?

You have an apartment you love, a car that’s paid off, and no student loans—so why do you want better credit? First, it’s important to remember bad credit can follow you for a long time, as in several years. That means you need to plan now for the future. You should also remember your credit score can affect a lot of aspects of your life, like renewing a lease, buying a house, or even getting a job. Your credit score is not just about how much money you have—it’s about how dependable you are in repaying your debts.

Where to check for free

There are a few services that allow you to check your credit for free. While you may be limited in the number of times you can check your score for free, these services are still reliable resources for being able to track your credit score on a regular basis.

Annual Credit Report: You are entitled to a free credit score every year through the Annual Credit Report service. If you’re not taking advantage of this report, you should start. A) It’s free! and B) Even if you have great credit, no credit, or are currently living off the grid where no one can find you, it’s nice to check in once in a while and make sure your score has not undergone any unexpected changes in the last year. There are no downsides, so sign up for this service ASAP.

Equifax: This service currently offers six free reports a year. This is frequent enough to help you stay on top of your credit score, but not so frequent that you will be getting updates every day. If you want a way to keep tabs without notification overload, this might be the right choice for you.

Credit Karma: This is an option that’s grown in popularity over the last few years. With the ability to check your score anytime, the Credit Karma service is useful for those who like to track every change in their credit. You can sign up for email or text alerts, and download the app to get even more updates and info.

Other places: Did you know your credit card statement probably has your credit score on it? So do your mortgage documents, and your bank can sometimes tell you more about your score. These are great and easy ways to find your current score and see how your credit is improving.

There are various options for checking your credit score for free, but starting with one of the examples here may be a great way to dip your toe in the water, so to speak. Of course, you can always do some research on your own and look for even more choices that allow you to check your credit for free.

Your credit score will change (but not how you think)

Credit scores aren’t always consistent from service to service. Different credit bureaus use different criteria to determine your overall score. So, you may see one number on your bank statement and receive a different number from your annual report. Be sure to check the date of the report, as that can also account for any discrepancy you see between scores.

Be cautious about over-checking

It’s tempting to run your credit score all the time, whether you are just curious or even trying to apply for something small, like a store credit card. Be careful about running your credit too often (aside from checking through services like we mentioned above) because this can harm your credit rating. As long as you keep an eye on your spending and debts, you can get a general idea of how your credit score is faring for at least a few months at a time.

Managing a credit score is never easy, but it can be done with the right resources and a little planning. You don’t have to avoid it—you don’t even have to pay for it. Keep up with your credit so your future can remain secure.

Jumbo loans 101: Do you need one?

If you’ve never heard of a jumbo loan, it might sound like something you would find in a cartoon movie. But jumbo loans are very real and have gained popularity over the last few years. For the novices in the jumbo loan game, or if you just need a refresher, we’ve compiled some info you need to know before considering a jumbo loan, plus some pros and cons to know before you borrow.

What is a jumbo loan?

A jumbo loan, or a jumbo mortgage, is a type of financing that lends more than the amount of a conventional conforming loan, according to the limits set by the Federal Housing Finance Agency, or FHFA (the maximum loan amount is $510,400 in most counties as of 2020). You may also hear this referred to as a non-conforming conventional loan. While a conventional conforming loan is backed by Fannie Mae or Freddie Mac, jumbo loans are a horse of a different color in the finance world and are not guaranteed or securitized for lenders.

Why would I want a jumbo loan?

Typically, jumbo loans are used for instances like purchasing an expensive real estate property, purchasing a home in a highly competitive market, or purchasing real estate or a residence in an area that is generally more expensive to buy in, like New York City or San Francisco. Essentially, a jumbo loan allows you to borrow more than you would get with a conventional conforming loan.

What’s the catch?

A jumbo loan sounds almost too good to be true. While many people find that a jumbo loan is a great fit for them, it’s important to understand the commitment involved and the financial implications of taking out such a large loan. Let’s look at some pros and cons of jumbo loans.

Pros:

More money: As we stated above, the whole point of a jumbo loan is to get more money. If you qualify for a jumbo loan, you will be borrowing more money to buy what you want to purchase. Depending on your goals, this could continue to create a profit for you in the long run – for instance, if you were using the jumbo loan to buy real estate in a prime location that you could then rent out for more money.

Low down payment: For your conventional conforming loans, you can be required to put down at least 20% of the loan amount as a down payment. But a jumbo loan usually only asks for 10% as a down payment, sometimes even going as low as 5%. This means more savings for you up front.

More choices: Flexibility is the name of the game for jumbo loans. You can find one that is fixed over 30 years, or you can find one with an adjustable rate. Due to the nature of jumbo loans and what they are typically used for, it is easier and more common for lenders to tailor the loan to your needs, instead of you borrowing money on terms that are created for a demographic that doesn’t apply to you.

Cons:

More money: Yes, we realize this is also listed in the “Pros” section. But the jumbo loan is just that – a jumbo loan, meaning you need to be able to repay a jumbo amount of money. This type of loan often even requires you to put aside 12 months of your mortgage payment in savings to ensure that you won’t fall behind on payments.

More work: You will need a high credit score to secure a jumbo loan. It isn’t enough to pay most of your bills on time – you need to have a FICO score of at least 660, and, failing that, be prepared to make a larger down payment. If you think a jumbo loan is in your future, go ahead and start taking steps to improve your credit score.

High income requirements: Most lenders are going to approve jumbo loans for people who have a high annual income. Since they do not have the FHFA backing these loans, they want to ensure that their loan to you can be repaid. This means looking closely at your income, as well as your other financial assets and your loan repayment history. So, again, if you think you will need a jumbo loan to make your real estate dreams a reality, it’s time to lay the groundwork by growing your assets now.

So is a jumbo loan right for you? That’s for you to decide. But if you are still unsure, we always recommend consulting with a mortgage professional who can help you understand exactly what a jumbo loan means for your individual situation. A jumbo loan takes a lot of consideration, so begin researching your options as you plan for your financial future.

Forbearance vs. deferment: what’s the difference?

When you’re in the midst of a financial crisis, it can seem nearly impossible to dig your way out—especially if you’re paying off loans. However, there are various alternatives to ease the strain on finances, like forbearance or deferred payments. Forbearance and deferment are terms often used interchangeably—but, there are differences between the two. We’ve broken down the basics of forbearance and deferment, so you can decide what works best for you and your financial situation.

Forbearance

What is forbearance? 

A forbearance is an agreement between a borrower and lender to temporarily suspend or reduce payments. People typically request forbearance when they’ve experienced a temporary financial setback, like job loss or illness.

How does forbearance work?

During a forbearance agreement, lenders agree to accept reduced payments or no payments for up to 12 months. When the forbearance period ends, the borrower must resume payments and repay what they owed during the forbearance period, plus interest and possible fees. Repayments can be made in a lump sum or up to 12 installments added to regular monthly payments.

Most people request a forbearance on their mortgage or student loans. But, forbearance works differently depending on each situation.

Homeowners can request a mortgage forbearance to catch up on payments and avoid foreclosure. Most lenders require proof that homeowners are enduring a temporary financial hardship, as well as assurance that the borrower can pay back what they owe when the forbearance period is over. During the forbearance period, lenders stop foreclosure proceedings and allow the borrower to make reduced payments or no payments. If your financial trouble lasts longer than anticipated, or you don’t have the funds to make repayments, you can discuss options with your lender, like a loan modification.

Student loan borrowers can apply for forbearance when they are facing a temporary hardship and don’t qualify for deferment. With student loan forbearance, you can temporarily halt payments for up to 12 months at a time with no set maximum for federal loans. You do not need a specific, qualifying event to apply for student loan forbearance.

Are you still charged interest during a forbearance?

Interest accrues on both mortgage and student loan forbearance, unless otherwise stated. Because of COVID-19, federal student loans were placed on administrative forbearance, and interest rates were reduced to 0%, so they’re not accruing interest right now. For mortgage forbearance, interest accrues on skipped or lowered payments. So, you will have to pay back what you owed during the forbearance period, plus interest. For student loan forbearance, the amount you owe will always increase—at the end of your forbearance period, interest may capitalize, which means it’s added to your loan’s current principal balance. From there, interest will be calculated on the new amount.

Does a forbearance impact your credit score?

Mortgage forbearance can lower your credit score—but, it depends if your lender reports it to the credit bureau. If they do, then your credit score could dip. And, if you wanted to refinance or purchase a new home, you have to reestablish yourself as a credible borrower, so you must repay what you owe. Still, a temporary drop in your credit score from a forbearance is much better than a missed payment—and it helps avoid foreclosure, which can stay on your credit report for seven years. For student loans, forbearance does not affect your credit score.

Deferment

What is deferment? 

Deferred payments, sometimes called payment holidays, allow you to delay or suspend payments on a loan—generally a consumer loan. If you’re experiencing financial hardship, deferring a payment could be beneficial, as it temporarily halts the burden of making repayments. It could impact you in the long run—you may end up with higher monthly payments, and your loan’s term will increase.

How does deferment work? 

Similar to a forbearance, during a deferment period, payments are suspended but for a shorter amount of time. And, unlike forbearance, you are not required to pay back what you owe all at once. What you owe is usually tacked onto the end of your loan’s term, which is why your loan term often increases. Most people request deferred payments on their auto loans or student loans. Again, deferred payments work differently depending on the circumstances.

Lenders will sometimes allow you to defer your car payment for a month or sometimes up to three months. Most lenders ask you to provide a brief explanation as to why you need to defer your payment, and they may also review your credit score or credit report. It can be a viable solution in the short run. But, deferring a car payment isn’t always the best long-term choice. If you realize your financial trouble may last longer than anticipated, discuss refinancing options with your lender.

Similarly, borrowers can request a deferment on their student loans to relieve the financial burden. Unlike forbearance, you must have a specific, qualifying event to be approved. Student loan deferment generally works best if you have a subsidized federal student loan or a Perkins loan. And, deferment length depends on the type of deferment—some last up to three years, while others last as long as you qualify.

Are you still charged interest during a deferment?

For student loans, interest does not accrue on subsidized federal student loans and Perkins loans. For other consumer loans, whether or not you’re charged interest depends on your loan type, so it’s best to check with your lender first. You may be responsible for interest that accrues while your payment is postponed. You could potentially receive a break if your interest rate only applies to your principal balance—which means you won’t be charged interest on the interest that accrues. Once you restart payments, the interest that accrued during your payment holiday could be added to your principal balance, and your interest rate would then be applied to the new, larger principal balance—meaning even more interest could accumulate once you resume your regular payments.

Does a deferment impact your credit score? 

Deferred payments usually don’t impact your credit score. When your application is approved, your lender reports to the credit bureau that your payments are deferred. But, if you stop making payments or miss a payment due date before you’re approved, those missed payments could damage your credit. If you missed payments before you applied for a payment holiday, those won’t be removed from your credit history, either. You must continue making your payments until you have verification that your payments are deferred.

Deciding to apply for forbearance or deferment is an enormous decision, and there are various factors to consider. It’s critical to think about how long you anticipate a lapse in finances, your needs, and the potential outcomes.

If you’re facing financial trouble, you’re not alone—at Georgia’s Own, we’re here to help and provide financial advice and resources to get you through whatever financial struggles you’re facing. If you require financial assistance because of COVID-19, click here to see how Georgia’s Own is helping members during this time of need.

The Paycheck Protection Program: What is it and what does it do for small businesses?

Congress recently approved an additional $310 billion in funding for the Paycheck Protection Program as part of the CARES Act, the stimulus bill created in light of the economic downturn due to COVID-19. We’ve broken down the basics of the Paycheck Protection Program for small business owners, so you can understand how to navigate the program and receive funds as quickly as possible.

What is the Paycheck Protection Program? 

The Paycheck Protection Program, otherwise known as the PPP, is the driving factor in the small business portion of the coronavirus stimulus package. The PPP is a forgivable loan that allows small businesses to continue paying their employees, mortgage interest, rent, and utilities, over eight weeks. It’s intended to help businesses keep their workforce employed during the COVID-19 pandemic. Businesses can receive up to $10 million, or 2.5 times their monthly payroll.

Who is eligible for PPP? 

Small businesses—companies with fewer than 500 employees—can apply for PPP loans. Businesses must demonstrate that they have been negatively affected by the coronavirus. Qualified businesses include any business categorized under “accommodation or food service,” such as restaurants or hotels, with 500 or fewer employees, tribal businesses, independently owned franchises, self-employed workers, independent contractors, sole proprietors, or gig workers.

Where can you apply? 

PPP loans are managed by certified Small Business Administration (SBA) lenders. You can apply for a PPP loan through approved SBA lenders or any federally insured depository institution, federally insured credit unions, and Farm Credit System institutions. Talk with your preferred lender to see if they’re participating. The SBA also has a lender search tool on their website. If you have already applied, check with your lender to verify your application status. The deadline to apply is June 30th, 2020, when the program ends, but you should apply as soon as possible. You should only apply through approved SBA lenders—many scammers are using this time of desperation as an opportunity to take advantage of people. Legitimate lenders will not ask for your Social Security number, bank account, or credit card numbers upfront.

As the SBA accepts loan applications, Georgia’s Own will process member requests in the same manner in the order they are received: please submit your contact information to [email protected] In your email, please include the business name, type of industry and if you are business or retail type, number of employees, and contact information, such as an email address and/or telephone number.

How does PPP loan forgiveness work? 

If you use the loan for anything other than payroll costs, mortgage interest, rent, and utilities throughout the loan, your loan will not be forgiven. Also, it’s only forgivable if you keep all your workers. So, if you previously laid off employees, you’ll need to rehire them. You can submit a request for loan forgiveness through your lender. The number of full-time employees and pay rates, as well as payments on the eligible mortgage, lease, and utilities will need to be verified. However, the loan carries a 1% interest rate that must be paid back within two years—payments can be deferred for six months.

For more information on loan resources for small businesses, visit sba.gov. And, to see how Georgia’s Own is helping members, small businesses, and the community during this time of need, visit our website.

What you need to know before lending (or borrowing) money from family

In the midst of a financial crunch, most people consider borrowing money from a family member to be a better option than a bank or credit union, a good friend, their 401(k) plan, or even a low- or no-interest credit card. While most people look to their family as the non-judgmental, do-anything-to-help, ideal solution to their financial dilemmas, there are pros and cons to entering into this arrangement for both the lender and the borrower.

It seems like a simple transaction

From the borrower’s perspective, the application process is simple—just ask. Other than explaining why it’s needed, there are typically no other requirements to meet, not even a credit check. Even better, family members are often generous enough to loan money for free. Most don’t charge any interest, or if they do, it’s much lower than the best rate a bank or credit union could offer.

Family members are often eager to help, but if they’re lending money, they should understand their motivation behind their offer and the risks they assume in doing so.

The details define the loan

When a family member loans money to another family member, details need to be documented, and specific expectations must be set. Conversations around money are tough and sometimes extremely awkward. Think of this as the price you pay for borrowing money from a relative.

Discussions should address the reason for the loan and whether or not the lender is expecting to be repaid. A repayment schedule should be agreed upon, including dates, amounts, and method of repayment, and steps that will be taken if the borrower defaults on the loan.

The borrower should be able to provide the plan for repaying the loan and address the possibility of missed payments. Discussions should also define any rights that are granted to the lender until the loan is repaid in full, like approving large purchases or vacation plans, reviewing a monthly budget, or monitoring bank accounts.

The more detail discussed before the loan is issued, the better chance of preserving the family relationship. Many family loans are successful, but, in order to avoid tensions, communication must be continuous, clear, and in writing. While some family members might consider this too formal, it’s for the protection of both parties.

Lenders need to protect themselves

Any time you lend money, there’s a risk that the borrower will not be able to repay the loan. While you may have every confidence that the borrower will be true to their word, lenders should consider collateral to secure the loan. In the case of default, the sale of any named asset could help recover the outstanding balance.

Speak with your attorney to discuss any additional risks that you should address in order to protect yourself. You can also ask your attorney to draft the written agreement that includes the agreed upon details of the loan and its repayment.

Tax implications to consider

In addition to ironing out the details of the loan, there are serious tax issues to consider. The transfer of large amounts of money can alert the IRS. Even without any wrongdoing, it could trigger an audit into your finances.

There are also rules that address the minimum interest rates that can be charged on personal loans and a potential gift tax that can be assessed in some cases. There may be other tax implications that you hadn’t yet considered, so be sure to talk with your tax advisor before you set an interest rate, sign any documents, or transfer any funds.