By Warren Taylor, BankMobile President
The following information is provided for educational purposes only and consists of hypothetical information and examples designed to educate our readers. A home equity line of credit (HELOC) is a loan that is secured by a lien against your home. The line of credit loan works like a credit card, where one has a maximum amount they can borrow, and a minimum payment that needs to be made each month. The balance can fluctuate between $0 and your maximum loan amount.
Advantages to a HELOC
There are advantages and disadvantages to this type of loan. First, let’s talk about the advantages. In some cases Often the interest on this loan is deductible on your Federal Tax returns (consult your tax advisor regarding deductibility of interest). The rates on these loans are typically among the lowest you can find – because it is secured with your house.
Disadvantages to a HELOC
This leads us into the disadvantages. If you do not pay your home equity line of credit loan as required, the bank will take your house from you in a foreclosure process. The loan could also be callable if there is an issue of default. The other disadvantage is people may misuse their line – more on this later.
What to Look For When Shopping for a Home Equity Line of Credit
When shopping for a home equity line of credit, you should look into the following areas:
- What is the floor interest rate?
- What is the ceiling interest rate?
- What is the initial interest rate?
- How long does any initial (teaser) rate last?
- What is the index? What is the margin?
- What fees are applicable during the life of the loan– and when you pay the loan off?
- Is the loan callable?
- How long are you able to make draws?
- Is the monthly payment just interest (where the balance does not go down unless you make payments towards principal) or is the monthly payment principal and interest (where the balance goes down, but your payment is higher).
Most people just look at the initial rate when shopping for a home equity line of credit – and nothing could be more dangerous. This is what most banks want you to do – bankers even call the initial rate a “teaser” rate. It teases you into taking the loan because the initial rate is so low. Teaser rates are not bad – one just needs to look into the other “danger factors” too.
Danger #1: The Floors & Ceilings
Let’s begin with the most important “danger factor” – ceilings and floors. A “floor” rate is the lowest the interest rate could ever go. So, even if the bank tells you your rate is equal to the Prime rate (currently at 3.25%), the interest rate you will be charged is actually 4%, because that is the floor rate. Floors are not a big danger, but knowing the floor rate will save you money in the current rate environment. The danger is the “ceiling rate”. This is the rate your loan can go up to. Let’s say you borrowed $50,000 off a home equity line of credit to put in a swimming pool. At a 3.25% interest rate, your monthly payment would be roughly $135 a month (if the loan was interest only). For example, if the HELOC’s rate jumped to 21%, your payment would jump to approximately $875 a month. Maybe you can afford a $135 monthly payment, but if your monthly payment increases $740, to $875 a month, will you be able to make the payment? If you are unable to make your monthly payments, then the bank could eventually take your house from you. Knowing your ceiling is critical! Find the lowest ceiling possible.
Danger #2: How You Use Your HELOC
The second “danger” has little to do with the bank or pricing, but more about how you use the loan. Your behavior is the second biggest danger. Some home equity lines of credit charge a monthly payment comprised only of interest (not principal and interest) for the first 10 years. The behavior you want to employ is matching your loan term with the “life” of whatever you are buying.
Let’s assume you are buying a car using your HELOC, as the interest paid may be tax deductible (Consult your tax advisor regarding deductibility of interest), whereas interest on auto loans is generally not tax deductible for consumers. The car cost $25,000 and you purchase it with a check drawn against your HELOC. If your HELOC balance were $25,000 and your interest rate were 3.25% and your monthly payment is interest only, then your monthly payment would be about $67. But remember, if you paid just this amount each month, then the balance of the loan is not going down, but the value of your car is.
So, you should consider never taking a car loan for more than 4 years (see previous article on why not). If you want to pay this car off in 4 years, at 3.25% interest, you would have to pay approximately $556.12 per month. So to match the loan term with the “life” of the purchase (car), you should pay $556.12 per month and have the car paid for in 4 years. Do you have the discipline to pay $556.12 each month even when the bank sends you a “payment due” amount of $68? What term do you use for each purchase?
Here are some additional examples:
- Vacation: 1 year to pay off
- Braces for your child: 2-3 years
- House addition: 5 to 15 years depending on the cost of the addition
- A computer: No more than 1 year
Get the picture? You should have the discipline to pay more than the minimum payment listed on your bank invoice.
Look for Fees
Most banks will not charge fees for opening a HELOC, but make sure you look at the fee schedule. If you close the loan off, typically before two years, the bank may charge you an early termination fee. This is because the bank spent money appraising the value of your home and processing your loan and they need more than two years of interest payments to offset the cost of underwriting a loan. You should be able to open a HELOC without incurring any fees.
Teaser Rates, Index, and Margin
A teaser rate is just an initial rate of interest the bank entices you with to get you to open a HELOC from them. These teaser rates usually last 3 to 12 months – the longer the better! Then, after the teaser rate is over, your real rate kicks in. That rate is the index rate plus the margin. Your index might be “Prime rate” and your margin may be ¼%. To calculate your real rate, take the index of Prime, currently at 3.25%, and add your margin to it. In this example, your real rate would be 3.50%. Open a HELOC based on your real rate and the ceilings and floors.
The Final Danger – Defaulting on Your HELOC
The final danger – what if you are in default on your HELOC? Obviously, this is not good and something you should avoid at all costs. A default can happen when you miss a payment, the value of your home goes down significantly, your credit score worsens, or you lose your job to name a few reasons for default. When a loan default happens, the bank can “call” your loan. This means the bank asks you to pay off the whole loan amount – now or in a short amount of time! Chances are good that if you pay your loan on time, the bank will not throw you into default.
You are now prepared to go HELOC shopping. Remember, have the discipline to match your monthly payment with the “life” of the product or service you are buying.
The views and opinions expressed by Warren Taylor are not necessarily those of the bank. The blogs are intended as general financial knowledge that may or may not be applicable to your individual needs. Always contact your accountant for tax advice.
Your Easy No-Regrets Holiday Spending Plan
Helloooooo ho ho, holiday season! Oh yeah, anddd guilt and regret. Well the guilt and regret part usually arrives after but, since we’re friends and all, we wanted to bring this to your attention today in case your financial rationale is already starting to diminish due to the effect that all of the holiday music you’re hearing everywhere is having on your brain.
You know, so you don’t do what you did last year around this time to wind up feeling like you did during the 1st week in January—when it finally dawned on you that maybe you should check your bank account and credit card statements during lunch at work [gasp]… Yup, we can already hear you saying, “Oh please let there be some leftover champagne from New Year’s when I get home (NO, scratch that… that bottle was $200 and the thought just makes me sick on multiple levels)!”
Here’s your reality check, my friend… Gifting your heart out is great and all, but not at the expense of all the nasty guilt you’ll feel IF you haven’t taken the time to get a No-Regrets Holiday Spending Plan together.
Cue the heavenly angel sounds as we provide you with a simple solution.
Holiday Spending Budget (Hold the Guilt and Regret)
1. Set a REALISTIC Spending Limit:
It’s simple. Just ask yourself, “When it comes to the amount that I have left over AFTER all of my expenses are taken care of, how much am I willing to put towards gifting?” (You may wish to consider cutting back on doing things for yourself this month, you know, in the spirit of giving to others!)
2. Create a “Naughty” and “Nice” List:
Seriously, get out that pen and paper or open up a new note on your phone—put your “realistic spending limit” at the top. Then create an “Important” section (i.e. immediate family, significant other, best friend—cap it at 5-7) and an “Everyone Else” section (all those people you care about on some level that didn’t make the important list).
3. Divvy Your List Like So:
FIRST, for the “Important” people on your list… Start divvying up that “realistic spending limit” among these folks—go ahead, write an amount next to each person. When done, add up all amounts under “Important” and make sure that total is less than or equal to your “realistic spending limit.” And for all you overachievers out there, start brainstorming the gifts for each person that fall into the amount next to their name. (Stuck for an idea? Google: “Gifts for _____ under $X”)
SECOND, for “Everyone Else” on your list… Don’t be a scrooge and totally forget about these peeps. Gift simple, gift cookies!
…About Those Cookies
Here’s a great no-bake cookie recipe that we love right now and don’t forget to put the delicious morsels in some festive packaging (save here by buying in bulk). Done, and done!
Have tips and tricks that you use to manage your spending during the holidays? Share them in the comments below. Happy Holiday Shopping!
Scary Good Ways to Reap Halloween Savings
Save Money on Halloween…
Are you ready for Halloween? Before you hit the party supply store, we have some great tips to help you save money on Halloween this year.
Last year the National Retail Federation reported that Americans were spending almost $3 billion on Halloween costumes and just over $2 billion on candy! As part of our #LiveFreeBankFree movement, we think there’s a better way, and wanted to share some scary good ways to help you reap some serious Halloween savings without eliminating an ounce of fun.
Want to turn your home into a haunted house for a night? Sure you do! Get crafty and DIY your own décor to save. The best way to keep it simple is to pick a theme for your Halloween decorating, so everything from your candy to your costume and party supplies will look cohesive. We found an awesome blog post on savvysassymoms.com that has some simple, cheap Halloween decorating ideas (our fave is the boo-tiful marshmallow ghosties made from a lollipop and marshmallows). And if you’re not into DIY, we recommend checking out Oriental Trading’s Halloween Sale for some cheap party supplies and Halloween decorations.
Every great Halloween party needs some frightful food and drinks. But food and drinks can eat up your budget rather quickly if you’re not careful and fearful of getting creative. To help you out, we found a great post that features 24 wicked good Halloween appetizers and breaks down the cost per serving of each. Need even more inspiration? Check out this Halloween Food Ideas Pinterest board for some spooktacular recipes. We hope you’re starting to get a taste of all the Halloween savings available to you!
No Halloween is complete without some spooky sounds and songs. For Apple users, check out the Halloween Spooky Sound Box app, which gives you a variety of tunes for Halloween. You can also find some frightfully awesome sounds on YouTube to play from your mobile device or laptop, like this one that has 75 minutes of old school Halloween sound effects.
One of the best parts about Halloween is figuring out your Halloween costume, and you don’t have to buy a ready-made costume to make an entrance. Our first Halloween costume tip is to take advantage of all of the unused costumes that may be filling up the closets of your friends and family members and do a swap. If that’s too much of a hassle, here are a few budget-friendly Halloween costume ideas you can make on your own:
- Mummy: Just wrap yourself with toilet paper…over and over and over.
- Ghost: Grab an old sheet and cut a few holes in it. Done.
- Nerd: You could grab most of these supplies at a thrift store or dollar store: bowtie, button down shirt, tight pants, and glasses – don’t forget the tape!
- Housewife: Grab an apron, a dress, and a headband.
- Old School Hip Hop: Some cool sunglasses, a gold chain, some gear and kicks and you’re good to go!
Need some more ideas? Check out these cheap and easy last minute Halloween costume ideas from Buzzfeed.
Halloween is one of those times that procrastination can work in your favor. If you wait until the last minute to buy your Halloween candy supply, you may get lucky with the stores marking down their Halloween candy a few days before to make it move so they can get ready for the next set of holidays. Opt for bulk buys to save money and check your local newspaper for some coupons. When your cute ‘lil trick-or-treaters ring your bell, don’t let them reach in and grab a handful of candy. Instead – pass it out yourself.
Do you remember going out trick or treating with a pillowcase? Why not bring that concept back and remix it with a new school twist by decorating an old pillowcase together as a family! Bust out the glitter and paint and go to town before you hit the streets.
Stick to Your Halloween Budget
Halloween doesn’t have to be scary expensive. And if you need a way to save for this holiday, consider opening up a free high-yield savings account and transferring some money over each week to build your Halloween fund. Having a dedicated fund will help you stick to your Halloween budget.
If you have some of your own spooky ideas, share your tips in the comments below. Happy Halloween!
Real-World Ways to Avoid Online Scams
You may think that people who get scammed online are the ones who respond to those crazy emails from a foreign prince, but online scams happen to millions of innocent people each year.
The Bureau of Justice reported that identity theft cost almost 17 million Americans roughly $25 million in 2012—and that’s just one of many types of online scams.
That my friends equates to 7% of people in the U.S. over 16 years old! And college students specifically are a population at risk because they may not necessarily take the steps to protect their personal information from being stolen from their laptops and mobile devices or even their dorm. So what exactly do these online scams looks like and what are some ways to avoid those online scams?
Beware of These Types of Online Scams
- Phishing:No – we’re not talking about catching that big fish – but phishing is quite similar in the realm of online scams. The phish scammers are trying to catch you – and they do it by sending you spam or getting you to click on pop-up messages online (the bait) so they can get your personal info if you bite (giving them their big catch).
- Identity Theft:Online scammers use stolen captured personal information, like your Social Security Number, to open credit cards or create new bank accounts in your name. They also use it to withdraw money from an established account, go on shopping sprees, apply for loans in your name or even rent apartments or storage units!
- Smishing:A close cousin to phishing, smishing is a newer scam via text/messaging. Often times the text/message is something alarming and contains threats of awful consequences if you don’t reply ASAP. And what do they want? Your confidential information.
- Keylogging:Another online scamming term is keylogging, which is a way thieves use malware that records your keystrokes to capture your personal information right as you type it in. This could be your online banking password. Yikes.
- Flipping money:This is an older scam that’s been repurposed via social media. Messages are being posted via Facebook, Instagram and Twitter to entice you into making BIG MONEY quickly. Some of these tweets and posts have a photo of someone holding up a huge check or tons of cash. If you contact them about this amazing opportunity, they will ask you to buy a pre-paid card and give them the PIN so they can take the money and run – without any paper trail.
How to Avoid Scams Online
While no one is impervious to online scams, there are ways you can lessen your chances of becoming an online scammer’s next victim. Here are some helpful ways to avoid scams online:
- Don’t post too much personal information online or via social media. Love getting those birthday wishes via Facebook each year? We do too. But don’t post your actual birthday, including year, as this is one of those pieces of personal information that online scam artists are after. Also be cautious about posting your travel plans or sharing pics while you’re not home. You don’t want to tip off any crooks that your house is fair game for a week. Other things to avoid posting – your pet’s name, your address, your mother’s maiden name – basically anything you use to create a security question for your online banking can be sourced via your Facebook page.
- Make your passwords strong and keep changing them. Did you know that a 4 digit number password can be hacked in just 0004 seconds and a password with 10 characters containing letters, some of which are capitalized, digits, and a symbol (like a comma, period, or exclamation point), can take 17,000 years to hack? The lesson here is to make strong passwords and change them often. Read our post to learn how to make a strong password that’s easy to remember. Don’t use information like your birth date or phone number either – it’s too easy to guess. And don’t ever share your password. You also should avoid allowing your computer to remember your username and/or password.
- Safeguard your computer and mobile devices.Make sure to keep your computer updated with the most current anti-virus and anti-spam software. You’ll also want to install a firewall and anti-spyware software to be safe. To keep your mobile phone safer, make sure to update your apps, especially your financial and mobile banking apps, and only install apps that are from trusted marketplaces.
- Be careful with Wi-Fi.Don’t do your online/mobile banking or send personal information over public Wi-Fi. Others on the network can intercept it and use your info in an online scam.
- Never give your personal information to random people.Please never give out your sensitive, personal information through email, over the phone or via text. Make sure the company you are communicating with is legitimate, and if you’re ever unsure, call them instead. Only share personal information with those you trust.
- Be prepared. Keep a record of your account numbers and their expiration dates. Also make sure you have your bank’s phone number in case you need to report any weird or fraudulent activity.
- Don’t hand over your debit or credit card. Never give out your debit card to anyone—not your children, friends or roommates. Also don’t get in the habit of leaving your receipts or bank statements lying around where anyone can see them. When it’s time to throw these out, always shred. (Yes, people have been known to dumpster dive to get this type of info!)
- Keep tabs on your credit. Check your credit report annually – it’s free at annualcreditreport.com. Check over these reports and look out for any errors – that could be a sign of identity theft.
FTC’s Tips for Protecting Yourself Online
The Federal Trade Commission recommends these tips below for protecting yourself online:
- Only bring the card you need with you, and don’t put your debit and credit cards in your wallet. If someone steals your purse or wallet, it will help minimize your loss.
- When making a purchase, keep tabs on your card and get it back before you leave.
- Don’t sign a blank receipt. If there are any blanks, cross them out.
- Save your receipts and compare them with your bank statements.
- Open your bills quickly, or look at them online regularly, then reconcile them with the purchases you’ve made.
- Report any questionable charges or transactions to the card issuer ASAP.
- If you’re going on vacation or moving – call your bank, whether it’s a branch bank or an online/mobile bank and card issuers so they don’t keep sending your statements for someone else to view.
- Don’t write down your account number on the outside of any envelope.
How to Report Online Scams If You’re a Victim
If you think you are, or may be, a victim of an online scam, contact your bank, credit card and other financial institutions ASAP. Additionally, if you believe you’ve been scammed online, reporting online scams by filing a complaint with the Internet Crime Complaint Center (IC3) is recommended. A good resource to visit is IdentityTheft.gov – they have information on where to file a report, and how to begin the recovery process.
Online Banking Scams Happen
As a branchless bank, we want you to understand that online banking scams are a reality in our world today and you should take the necessary steps to protect yourself.