The financial industry is filled with acronyms, and one of those is a HELOC, which stands for a Home Equity Line of Credit. On this episode of the Pocket Change Podcast, our guest Spencer Pratt, Executive Vice President of Leaders Credit Union, explains everything you need to know about HELOCs and the various ways you can use them.
“The most popular use that we see is debt consolidation. So basically, they're able to borrow at lower interest rates using this product to pay off higher interest rate debt that they may have, or possibly just lower their payments. They may have several payments. Buying it all into one. They can buy it all into one smaller payment so they can pay it off quicker.”
A HELOC (Home Equity Line of Credit) is a type of loan that allows you to borrow money against the equity in your home. The equity in your home is the difference between the current value of your home and the amount you still owe on your mortgage. HELOCs are a revolving line of credit, which means you can borrow money as needed and repay it at any time. The interest rate on a HELOC is typically variable, which means it can change over time. HELOCs can be used for a variety of purposes, such as home improvements, debt consolidation, or medical expenses.
“Usually all the money is advanced once and then you're paying it back over a set period of time. In this case, home equity lines of credit are structured where there are draws that can be made, actually unlimited draws. You can make as many draws as you want as long as you have available credit. It's typically a loan that is placed against your house. So it's a mortgage against your home taken as collateral. It's usually some amount that's based on the equity in your home.”
A few benefits of HELOCs are lower interest rates than other forms of borrowing, flexibility, and long repayment terms. There are a few risks associated with HELOCs including variable interest rates, repayment period, and early repayment penalties. It is important to review the benefits and risks when considering a HELOC, but our Financial Champions here at Leaders can answer your questions and help you decide if this is a good option for you. You can open a HELOC by visiting one of our branch locations, or you can apply online and finish the paperwork in a branch.
Leaders offers resources to help you discover if a Home Equity Line of Credit is the right choice for your financial needs.
You can visit one of our branches or check out our website to learn more about HELOCs and how they can benefit you on your financial journey.
Shea:
Hey, this is Shea.
Mary Helen:
This is Mary Helen.
Shea:
Welcome to the Pocket Change podcast.
Mary Helen:
Where you'll learn better ways to spend, save, and invest and take control of your financial journey.
Shea:
Mary Helen in the financial services industry, there are acronyms for everything. C.U., that stands for credit union. Sometimes we abbreviate that, but there's so many more that for different financial products and services that maybe the average person, average listener doesn't know. So we're going to talk about one of those, a HELOC. Have you ever heard of what a HELOC is?
Mary Helen:
I've heard of it, but tell me more.
Shea:
So we're going to learn more about it. What a HELOC is and what it entails and how it can benefit our listeners and our members. Really, HELOCs have taken off. It's a tool to help with special purchases and you can use your home's equity. In the last quarter of 2022, HELOC's increased $14 billion. So there's a lot of Americans taking advantage of a HELOC. And so we're going to talk about what that is and how that can benefit our listeners.
Mary Helen:
We are so excited to welcome our special guest, Spencer Pratt, Executive Vice President of Leaders' Credit Union. Thanks so much for being here today
Spencer:
Sure, appreciate it. Thanks for having me.
Mary Helen:
So tell us a little bit about yourself and what you do for Leaders.
Spencer:
My wife, Melissa, and I live here in Jackson. We'll be celebrating our 26th wedding anniversary in November.
Mary Helen:
Congratulations!
Spencer:
Yes. Thank you. Appreciate it. I have two wonderful daughters, Lidia and Claire, attend Augustan School here in Jackson. This is actually my second tour of duty with Leaders.
Shea:
That's right.
Spencer:
And so combined, almost 19 years here with Leaders. So in the role of executive vice president, I have the privilege of working with several of our teams. I get to work with our real estate lending team, commercial business services, investment services. I also work with our direct and indirect lending groups, manage a for profit business that the credit union owns called Leaders Edge. And in my spare time here, I also work on special projects. Right now, the project working on is looking at various pieces of property for possible expansion in the future. So that's been interesting.
Shea:
Always looking to grow. All those other duties as assigned, right? That's right. That you're taking on. We appreciate all that you do for Leaders and leading as a part of our executive team. Today we're going to talk a little bit about one of those lending products, and that's a HELOC. So tell us more about what is a HELOC? What does it stand for? So our listeners will know.
Spencer:
Sure. So as you mentioned earlier, HELOC is just an acronym. It stands for a home equity line of credit. There are several lenders that offer home equity loans, but they may not be structured as a line of credit.
Shea:
So the difference between that is a loan would be an installment loan like a car loan where you have a set payment each month for a set amount of time.
Spencer:
That's correct. Usually all the money is advanced once and then you're paying it back over a set period of time. In this case, home equity lines of credit are structured where there are draws that can be made, actually unlimited draws. You can make as many draws as you want as long as you have available credit. It's typically a loan that is placed against your house. So it's a mortgage against your home taken as collateral. It's usually some amount that's based on the equity in your home.
Shea:
So the equity is the amount, the value of my home minus what I owe, I guess, or what's left of that, right?
Spencer:
Yeah. So just a quick example. Let's say you owed $100,000 on your home and your house is worth $200,000. So if a lender is willing to loan up to 95 % of the value of a house, that total will be $190,000. You already owe $100,000 on your first mortgage. So you could open up a home equity line of credit for $90,000 as a second mortgage and have the availability to draw against and use that $90,000.
Shea:
So that is the way that people can have an additional mortgage product on their home to use for various purposes. And we'll get into what that might look like.
Mary Helen:
That's exactly right. So with that money, you get a HELOC. Using that example, you have $90,000 to use. What do people most commonly use it for?
Spencer:
Yeah. So the short answer is really anything you want. But typically we see people use the funds for everything from tuition for private school or college education. People will use it for home improvements. Some people use it to put in pools. It's a good time of year, by the way, for that. You'll have people that will use the money for... We have some people that use it actually to buy vehicles. Some people use it for small businesses, maybe to help start a small business. I would say probably the most popular use that we see, though, is debt consolidation. So basically, they're able to borrow at lower interest rates using this product to pay off higher interest rate debt that they may have, or possibly just lower their payments. They may have several payments. Buying it all into one. They can buy it all into one smaller payment so they can pay it off quicker.
Shea:
So where a credit card may be in the 20% range, this might be in the single digits for a HELOC, for instance. So that's great that there's that option for people that can maybe pay less in interest and use a HELOC to fund putting in a pool or redoing a kitchen or addition to a home or something like that.
Spencer:
I like to say, and the reason I personally like the product is it's really all about cash flow. So you're able to control the cash flow better with a product like this. It works really well for people if you have maybe variable income or maybe you're on commissions. If you're getting a one time, maybe you get a bonus at the end of the year. And so it allows you to have smaller payments during time, during short times, and then you're able to then pay larger sums against it and try to get it paid down quicker. And like I said, it's a line of credit, so you can borrow against it, pay it down, borrow against it, pay it down during the draw period.
Mary Helen:
So you mentioned a draw and payment period. Explain a little bit more about what that means in everyday terms.
Spencer:
Yeah, sure. So for example, our product has a seven year draw period. So once the loan originates, you have really up to seven years to be able to use the line of credit. We have some people that will open one and may never draw against it. They just like to have it available, almost like an emergency fund as available to use.
Shea:
Things can happen to a home, whether it's maybe damaged from a storm or wanting to do things that need to be replaced.
Spencer:
That's right. And sometimes from a timing standpoint, it can take a while sometimes if you're making a loan against a house. Sometimes it might take three or four weeks to get that completed. So if you have a home equity line already in place, then you can really immediately on your mobile app, in fact, you can go out and draw and have it available in your funds.
Shea:
Transfer to your checking account.
Spencer:
Yeah. Exactly right. So during that seven year period, you can draw, pay down, draw, pay down multiple times, really as much as you want. Payments are based on the amount that's drawn. So whatever the balance is at the time of the last draw, that amount then is amortized over a 15 year period of time. So for a fairly long period of time, so it keeps the payments low. At the end of the seven year draw period, at that point, it then takes whatever the remaining balance and amortizes out over 15 years so you can finish paying it out. Now you can always pay it off faster. There's no penalty or anything for paying it off early.
Mary Helen:
So if I were to have a HELOC year one, I take out or decide to use a certain amount. I have 15 years to pay it back and I can pull more out on the seventh year. Does that affect the amount that I pulled out on year one versus year seven, or will it reset?
Spencer:
So the payment will reset after each draw. Again, if you drew $30,000 originally and paid it down to 10, and then you drew another 30,000, so now you owe 40, you would have made the same payment the whole time after the first $30,000 draw until you made that next draw at whatever point. If it's three years, 40 or more years down the road, whenever. As soon as you make that next draw, it resets the 15 years starts over at that point.
Shea:
Keeps the payment reasonable for those type of purchases. That's a large purchase or a large draw if I'm doing 30,000, 40,000 to do an upgrade. I mean, that keeps the payments really reasonable. That's right. They're able to spread that out.
Spencer:
Just as a quick example, if you were drawing $50,000, if you had to borrow it, say for six years versus 15 years, it's about $400 cheaper per month. So it can be quite a bit of difference.
Shea:
Especially on a budget, you can really take that into consideration about how I need to navigate that to really fit my budget. So that's very helpful. So how does the interest rate work for a HELOC?
Spencer:
I knew you were going to ask about interest rates.
Shea:
Variable? What do we got?
Spencer:
Yeah. So the rate, that is the difference on the home equity line is it's one of the few products we have that actually has a variable rate of interest. And so the variable means variable just means it can float. In our case, this particular product, it floats monthly. The rate is tied to an index. In our case, we use what they call the prime interest rate. So you'll hear that in the news sometimes. The current prime rate, probably at the time this is being broadcast, is like eight and a quarter, 8.25%. And so our home equity loans can have rates as low as prime, which is 8.25%. There could be margins added to that. So additional added to the prime rate, depending on credit score or your loan to value, the amount that you borrow. But it tends to be a lot lower rate, as we mentioned earlier, than other forms of borrowing. So versus credit cards, unsecured loans, even home improvement loans, even some student loans. It can be a cheaper form of borrowing. But the rate is a variable. It does move up and down. It would be one thing you'd want to be comfortable with if you were considering this product.
We do offer other products at our fixed rate and have fixed time periods are paid out over, but they are not lines of credit. So typically somebody is looking specifically for a line of credit use, then they have to just be comfortable with that variable rate.
Shea:
And that can really hopefully give somebody that flexibility if they know, well, I need to draw this now and maybe in the future, we may do some more home improvements or pay off debt or whatever the case is. So I think what I've been hearing is it can be more flexible than just this set. I get this much at this amount of time and I have this many years to pay it back. That's correct. It gives me a little more flexibility of how I want to use it, when I want to use it, how much I can pay down based on my budget. And it typically will have a lower rate than a high interest rate credit card or something like that.
Spencer:
I mean, roughly a year ago, the rate was around 3.25%. It can get to be a low rate. They also tend to be fairly easy to open and to close fairly quickly compared to some other loans.
Mary Helen:
I was going to ask you about that.
Spencer:
Yeah. You can close them relatively quickly. It still might take six, seven days, but a lot quicker than a typical home loan. And the closing costs tend to be a lot cheaper than your typical home loan would be.
Mary Helen:
In terms of getting one, how could someone seek out a HELOC?
Spencer:
Yeah. So usually we originate those in the branch. Usually, we just visit one of our branch locations, our MSRs, our branch managers there all are able to open those particular loans. So at any of the branch locations, they can open them.
Shea:
So for a HELOC, we can go in a branch or a listener or member can go in a branch, but can we also apply online?
Spencer:
Yes, you can. You can apply online. It is a product, though, that does require you to come in to physically sign some paperwork.
Shea:
Okay. So you got to start online and finish in the branch and sign your final paperwork, and then you're good to go. It doesn't take as long as a traditional mortgage loan, for instance. So apply online, leaderscu.com.
Mary Helen:
Spencer, we have a fun question to wrap up the podcast episode. If you had some extra change in your pocket, what would you spend it on?
Spencer:
Many of the employees around here know that I have a sweet tooth. I would have said probably either Skittles or Starburst or something like that. But I'm trying to cut back on sugar. And so I am probably today, it would probably be something more like Doritos.
Shea:
All right. Cutting back on sugar but adding the salt.
Spencer:
I'm not sure that that's a healthier option, but it does have less sugar from what I've been told.
Mary Helen:
Do you have a preference of the...
Spencer:
Which type of Doritos?
Shea:
Kool Ranch or nacho.
Mary Helen:
I was going to ask what type of Skittles because I have a particular favorite.
Spencer:
As far as the color or as far as the...
Mary Helen:
Like the tropical wild berry?
Spencer:
I just go just the original.
Mary Helen:
Okay.
Shea:
Then last question, Doritos, Nacho, or Cool Ranch?
Mary Helen:
This is important stuff.
Spencer:
I like both. I guess I would say the original nacho.
Shea:
Original Nacho. You're an original guy.
Mary Helen:
You are.
Shea:
Thanks for being on the podcast today.
Spencer:
Absolutely enjoyed it. Thank you all for having me.