Part 2

FINANCING TIPS AND TRICKS: After you’ve picked out your car, your next step will be with the “F&I” department: Financing and Insurance. This is the last opportunity dealers use to make more money off their sale to you. If you’re not careful, F & I can stand for fleecing and infuriating! Here’s how to get out with the best deal you can.

1. A LITTLE BACKGROUND OF THE INNER WORKINGS OF F&I
   • Very few dealerships do their own financing. F&I people take the estimated price of the car, the actual value of the car and your credit history and shop the deal to several different financiers, such as banks and credit unions. These include major national lenders, manufacturer financial departments and, depending on the dealership, some local lending institutions. These vendors each quote an interest rate and relevant fee information to the salesperson or sales manager.
   • Car dealers usually have long-standing business relationships with these lenders, which may include incentives for selling a loan from a specific lender. Because the lenders are competing for the dealer’s business, not necessarily for yours, those incentives are for dealers, and not for consumers. While the dealer knows that lower interest rates make you more likely to buy a car, in this transaction, you’re not the customer. You’re the product. The dealer is trying to sell your business to a lending organization while making as much profit as possible on the transaction.
   • It may be convenient to handle the financing of your vehicle with the dealer once you’ve agreed to a sale. However, because of the background detailed above, you can see how you may end up paying a premium for that convenience. Come talk with us at the credit union before you reach that point. We can help you identify price ranges and terms that are best suited to your budget while also getting you pre-approved. It will shorten the process for you, give you buying leverage and minimize your susceptibility to aggressive sales tactics.
2. TAKE THEM FOR A RIDE!
   • Make no mistake, financing is profitable for dealerships in many ways. If they know they can’t turn a profit from financing, they’re more likely to push harder to find profit elsewhere. Unless you come in armed with a pre-approval, you’re almost always better off if you make financing the last part of your transaction with the dealership. This doesn’t mean, though, that you don’t want to think about financing until that point. Discuss your plans with a representative at the credit union, including the type of vehicle you’re thinking of buying. Figure out what kind of rates they can offer. By doing your research ahead of time and knowing what financing options are available to you, you can let the dealer think there’s still money to be made in the financing, which may strengthen your negotiating position on other parts of the transaction, like the price of the car or the value of the trade-in.
3. DON’T PITY THE SALESPERSON
   • Most of the time, your salesperson only benefits from the price of the car, the warranty and some high-markup items, like undercarriage treatment and upgrades. The financing department representative, the one responsible for getting quotes and delivering them to the salesperson, is the most likely recipient of any kind of commission on the financing. In these instances, it’s also very likely that the salesperson with whom you’re dealing has little or no control over your financing. He or she might be able to go back to the financing department and ask them to attempt to negotiate a better rate, but this negotiation may not have much success. In any case, someone at the dealership profits from getting you a loan, and it’s not necessarily you.
4. MIND THE GAP
   • “GAP,” or Guaranteed Asset Protection insurance, is automobile insurance that covers the difference between the total amount of the loan and the value of the car. It’s protection against the worst-case scenario, that your car is totaled, and you owe more than it is worth. Your comprehensive insurance coverage will only pay out the value of the car, leaving you on the hook for the remaining interest and finance charges. A dealer may require that you purchase GAP insurance as a condition of financing your car. The cost of the insurance is almost always paid up front as part of the financing charges.
   • GAP insurance is designed for long-term, high-interest or low-down payment financing. If you are buying a car without putting a lot of money down, or if your credit history is not stellar, consider getting GAP insurance. But, as with any other purchase, shop around. Because most financing arrangements require GAP insurance, dealerships maintain institutional arrangements with insurance agencies, expecting you to purchase it without much thought. It’s one of the last chances they must seek profit on the sale, and they rely on you not to notice. You may be able to find better rates on GAP insurance (and other insurances like Mechanical Breakdown coverage and loan Payment Protection) from your credit union, a broker or from another lending institution.
   • While you might not think so at first, the credit union offers this type of coverage and has a strong track record of protecting members’ purchases. Over the years, we have saved members thousands of dollars on their claims and helped keep debt scenarios from turning into nightmares.
5. STAY STRONG TO THE END
   • Financing is among the easiest places for dealers to make money because it’s almost always the last stop in the car-buying process. They are counting on you to be both committed to purchasing a car and exhausted from making a series of decisions. High-pressure salespeople use this fact to their advantage.
   • When it comes time to talk financing, frequently the license plates are off your old car and you’re sitting down with a sales manager. While it may seem counter-intuitive, this is the best time to walk away and get a second opinion. See if your credit union can offer you a better rate, lower fees or a more flexible term. Ask them to commit, as much as possible, to a price on an offer sheet, then tell them you’d like to take some time to think about it. If you come back with a cashier’s check in hand, the sales manager may hem and haw, but at the end of the day they’d rather make the sale than make a little extra on financing.
   • This is an especially important step if your history with credit is complicated. A giant lending corporation won’t see the steps you’ve taken to solidify your financial position. They don’t have the same relationship with you that your credit union does. They see you as a risk number and an interest rate they can justify. Always give your credit union a chance to beat the dealer’s offer – your credit union works for you, not for a commission.

PART 1

BUYING A VEHICLE – whether it’s a car, truck, SUV or other set of wheels – can be a remarkably complicated undertaking, with many decision points baked into the process. There’s a lot of industry-specific jargon, large numbers and high-pressure sales tactics. There are also a lot of moving parts, which can be overwhelming.

Before you step onto the dealer’s website or lot, have a talk with someone at the credit union. There are peculiarities to every situation, and you deserve to have someone you trust helping you look at yours. This way, you can go into a dealership forewarned about some of the biggest hurdles you’ll face during the car-buying process.

Do I buy new or used? There’s no one answer to this question. Much of it depends on your personal situation. Here are a few key factors to help you make up your mind.

1. WARRANTY
   • First, there’s the case of the warranty. Almost all new cars come with a built-in manufacturer’s warranty that’s good for three years or 60,000 miles. This is an invaluable benefit to buying a new car, as even the best-engineered machines sometimes break down. In addition to major repairs, some warranties cover routine maintenance, such as oil changes. If you have someone else covering the expenses for the first three years, that could be money you’re saving. You’ll want to make sure you stay on schedule for that routine maintenance, though, or you could invalidate your warranty.
   • Since the warranty applies for three years, you can sometimes find recently used cars that still have the original manufacturer’s warranty. If you buy a used car more than three years after it was produced, that warranty will be gone, so you’ll be on your own for mechanical issues that may arise.
2. REPAIRS
   • Vehicle repairs come with the territory of car ownership, whether you’re buying new or used. No matter how well the car is made, some parts will wear out over time. While you can expect to pay more to maintain a used car than a new one, no one gets away completely free. For example, Kelley Blue Book estimates that, in the second year of owning a Honda Accord EX, drivers may have to spend as much as $1,838 in repairs and maintenance. Those costs typically plateau as the vehicle gets older, but they never go away.
   • Given the possible expenses involved in repairs, buying a pre-owned vehicle can be a bit of a gamble. Of course, if you’re buying from a lot that’s connected to a trusted car dealer, it’s a pretty safe bet. Many lots inspect incoming cars and perform any necessary repairs or polishing. You’ll have to pay a little more at first, but the extra costs will buy you the security of a car without major problems.
   • Typically, a dealership that also sells new cars will spend the time and money to ensure its used inventory is also up to snuff. Buying from a used car specialist or looking for a vehicle on a site like Craigslist can be a bit riskier. It’s cheaper, but you’re going into that deal with no idea what the past owner has done to the car. The risks could include anything from a terrible smell to that dreaded check engine light. Whatever it is, you’re either going to have to live with it or pay to fix it out of your own pocket.
3. DEPRECIATION
   • Depreciation is a big concern when buying a vehicle. Depreciation is an asset’s loss of value over time. For all the reasons we’ve talked about and others, a car is worth less the longer it’s out of the factory. The biggest depreciation occurs immediately. Any car depreciates by approximately 11% of its original value as soon as it leaves the lot for the first time.
     • For example, a 2017 Toyota Prius V new costs $26,675. It would depreciate by $2,934 as soon as it rolls off the lot. That’s $2,934 you’ll never see again, and that’s only on the first day. Within the first two years, provided you’ve kept the car in near-perfect shape, the car will be worth just 74% of its initial purchase price. So that same Prius V would now be worth only $19,739 – meaning you’ve lost $6,936.

Before buying new, be sure you’re ready to make that hefty commitment.

If you’re buying used, the loss that new car buyers experience is your gain. For starters, all that money now gone to the depreciation is money you save. If you just wait on buying that Prius V until 2019, you’ll be able to buy it for only 74% of what it was originally worth. Not to mention that after the 26% a car loses in the first two years, the amount lost in depreciation drops significantly every year. After the third year, you’d lose only 7% of the original value. After that, the value lost to depreciation is just about negligible. That means that not only do you save more than 25% when you first buy, you also don’t need to worry as much about losing money to depreciation. The money’s already been lost by someone else; it’s not your problem!

Everyone buys cars for different reasons. That means that what they’re looking for in a car is different, too, as are the reasons they’re willing to save or spend money. Everyone has a different reason to decide whether to buy new or used. But if your goal going in is to save as much money as possible, there are some definite things you’ll want to keep in mind.

• Am I willing to take the risk on the car surpassing its warranty?
• Am I willing to pay extra for maintenance and repairs?
• Do I want to take a chance that the past owner treated the car poorly?
• Is it worth losing so much money to depreciation?

The more questions you ask, the more confident you can be in your decision to buy new or used.

Whether you choose to go new or used, you’ve only just begun making decisions. Your biggest choice comes in deciding what kind of car to get. This is probably the biggest purchase you’ll make other than your home, so you’ll want to be confident in your decision. If you’re stuck, consider the following:

1. RESALE
   • How long do you plan to keep your car? Do you plan to drive it until the wheels fall off, or do you see yourself wanting to upgrade in a few years? If this is a car you plan to own for less than five years, you need to look at the potential resale value.
   • Cars from luxury brands, such as Lexus and Acura, tend to hold their value well. Cars with a reputation for longevity and dependability, like Toyota and Subaru, also tend to depreciate slower than other brands. Also, look for relatively recent vehicle lines. These are car models that will likely still be in production several years from now, ensuring parts and service won’t be hard to come by.
2. DAY-TO-DAY
   • Many people start car shopping by making a list of things they occasionally do or want to do someday. They may want to own a boat, so they need a car that can tow. They go camping sometimes, so a car that can off road is preferred. This is a good way to end up with more car than you need.
   • Instead, look at what you use your car for daily. For most people, this is a commute to work and back. For this, you need a comfortable car that gets good gas mileage and is easy to park. For special occasions, you can always rent a car or truck. How many times a year do you see yourself picking up furniture or hauling a trailer? If it’s less than five, remember that you can still rent a truck or van for such occasions.
3. BUYING OR LEASING?
   • You have options when it comes to how to purchase your car. You can buy it, which means you’ll take out a loan for the purchase price. When the loan is paid off, the car is yours, free and clear. You can also lease a car, which is essentially a long-term rental. At the end of the lease term, you may have the option to buy the car, depending on the terms of the lease. If you choose not to purchase it, you may be charged penalties for things like mileage or damage to the vehicle. If you wreck the car, the insurance company will make the deal whole before they concern themselves with your damages.
   • Leasing a car isn’t as good a deal as buying. If you absolutely must have a top-end luxury car, a lease is one way to make it affordable. The tradeoff, though, is that you are building no equity. You’ll never be able to get a trade-in, and you may have to make expensive penalty payments when getting your next car.

You need a reputable lender for your second mortgage so you can avoid scams and get a good rate with someone you know and trust. That leaves two choices: a bank and a credit union. Obviously, banks and credit unions offer a lot of overlapping services. Both banks and credit unions take in deposits, administer checking and savings accounts, issue credit and debit cards, and provide home loans in addition to consumer loans. With the two types of financial institutions being so similar, what makes one more favorable than the other? Much of it comes down to guiding philosophy and who is most willing to work in the consumer’s best interests.

Who Gets the Profits?

Banks are corporations – owned by their stockholders. Typically, and especially at larger banks, these shareholders are Wall Street institutions. Credit unions, on the other hand, aren’t owned by stockholders on Wall Street; we’re owned by our members on the local Main Streets throughout our nation’s and world’s neighborhoods!

True, neither banks nor credit unions are in business to lose money. Both need to show a healthy bottom line to stay open. The difference is this: When a bank makes money, they send their profits to their stockholders, who most often have no connection to your local community.

When a credit union shows a profit, on the other hand, they pass it on to members – who are technically the owners. This can be in the form of dividends, better rates, technological investments and a variety of actions that bring greater value to members of the cooperative. Because credit unions are not forced to focus on pleasing distant shareholders through issuing a dividend every quarter, they can frequently offer services and loans at lower costs than banks.

The mutual ownership structure of credit unions gives them another advantage too: Wall Street can’t pressure credit unions to make unwise decisions for short-term gains at the expense of their membership. Every decision made by a credit union is solely in the long-term best interest of its members.

Ease of Service

Credit unions provide easy-to-use services and real, live human beings who can answer questions, make recommendations and help you understand the complex world of finance.

Lending Practices

For-profit banks answer to corporate owners. They expect a predictable, stable rate of return on their investments. This demand puts a straitjacket on lending and ensures those practices never deviate from a predetermined formula. However, let’s pretend you just got a new job, so last year’s tax returns aren’t a good indicator of how much you are earning. That’s not in the formula, so it doesn’t matter. Credit history ruined by an old medical bill? Credit unions are community institutions, so helping people out is part of what they do. Their rates tend to be lower than those of corporate banks. They also tend to be more willing to make exceptions for details that may not be reflected in the conventional lending formula.

Educational Resources

Credit card companies made it hard to tell exactly how much interest you were being charged. Banks charged overdraft fees without ever telling you they were doing it. These things got so bad; Congress acted. Consumer ignorance was built into the profit model of big financial institutions. Credit unions are not-for-profits that want to make their communities a better place. Part of that mission includes financial education. If you need advice about home buying, making a budget or using credit responsibly, your credit union will be happy to help.

Home Equity Loans and Your Finances

Your financial situation is like your fingerprint, because it’s unique to you. Reading this shouldn’t replace talking to a professional, but hopefully you’re armed with enough knowledge to make that meeting go smoothly. Home equity loans can be a great low-interest way to get money when you need it. The interest is usually tax-deductible, and the alternatives are often not nearly as good. Choose the right lender, avoid scams, and you’ll be on your way to financial success. If you’ve got your team assembled and your checklists completed, you’re ready to get started. Let’s work together to take the next step!

People generally obtain a second mortgage because of an emergency, to buy something fun, or to make a profit. You don’t need us to tell you about your emergency or what you find fun, so now let’s focus on using your home’s equity to improve your overall finances, and why it may be better to use your equity than a credit card.

Starting a Business

Millions of Americans dream of starting their own business. The risks are high, and many small businesses unfortunately fail. But the rewards can be high, too. If you weren’t born rich, owning a successful business is one of the best ways to build your wealth.

If you are hanging out a shingle as a consultant or professional of any kind, it’s important to have a unique knowledge of the topic that people will really think is worth paying for. It’s not enough to have a passion for a field if you don’t have the skills to add value to your clients. If you’re planning on entering the field you’re already working in, talk to professionals you already know before making the leap. They’re likely to be honest, and you’ll want them on your side once you’re on your own.

In addition to your expertise, you need to become fluent in business as well. If you don’t have a detailed business plan – one that includes a marketing and sales strategy, a plan to manage cash flow, raise needed capital, and an exit strategy for when you will sell or retire, you probably aren’t ready to quit your day job… yet. For a sample business plan, visit the Small Business Administration. Then, go see your team. Your accountant can help you with the numbers and your lawyer can help you with the paperwork.

No matter how careful the planning, businesses are almost always much more expensive to start and run than we thought. Think about your worst-case scenario – then double it. That’s probably very close to the mark. What happens if sales don’t meet expectations? What happens if you must spend more on inventory, insurance, technology or staffing than you had anticipated? Once you have the business plan, compare it to your net worth and call your mortgage consultant. Make sure you can afford what you want to do.

While using a home equity loan to start a business may sound exciting because you get to make money without a boss and follow your dream, be sure you’re on solid ground before putting that dream into action. There are risks involved in any business, but you can minimize those risks by doing your homework creating a solid plan.

Home Renovation

Stop and look around your house. Are you delighted with everything in it? This is where you spend a good portion of your day and where you and your family build happy memories. Are there certain renovations that would make your everyday life more rewarding? Remember, if you want your home to make a profit, the next person to buy it needs to see their dream home, too. A few improvements can make your day brighter and put money back in your pocket.

If you’re looking to improve your quality of life, then you probably know what you want to do to the house, based on your own lifestyle and what’s important to you. If you want to make a profit, consider relatively low-cost improvements that require little to no maintenance. They should immediately distinguish your house from similar homes and ideally also improve the energy efficiency of your home.

Here are four small-scale home remodel projects that can improve the resale value of your home. They’re excellent uses for your home equity line of credit (HELOC) and you may be able to save money by doing some or all of them yourself! Consult your tax advisor to determine if those improvements apply for tax deductions on top of energy savings and resale value.

• Replace the front door: There’s an adage in real estate that suggests features get tours, but the front porch gets sales. People make decisions on home-buying all the time by starting with a gut reaction and finding reasons to support it later. Upgrading an old, poorly-fitting front door with a newer energy-efficient model is a cheap, quick project that can instantly improve your home’s efficiency and aesthetic appeal. Best of all, hanging a door can be done in an afternoon, and has an ROI of 98%. Wow!
• Minor kitchen remodels: Replacing major appliances and installing new flooring is a difficult, time-consuming, and expensive task. Being without a kitchen for weeks on end can be a nightmare, but if you’re not happy with your kitchen, it might be time for a new one in any case, and a home equity loan can make it a reality. However, you might not need more than a few minor kitchen upgrades, like new cabinets, counter-tops, and energy-efficient cook-tops, which are comparatively inexpensive. The average spend here is just under $20,000 with an estimated return on investment at an impressive 80%. Just like with the front door, the changes are mostly aesthetic. People perceive a more modern-looking kitchen as being a better fit than a more “retro” look.
• Wooden decks: Outdoor space is one of the hallmarks of the current iteration of the American dream. Where else can a family sit and enjoy a frosty lemonade on a hot summer day? Watch the kids play in the yard while tending the grill on a beautiful wooden deck! The average cost of a new deck based upon a 16-foot x 20-foot wooden deck, is $10,000. The average return on investment is just over 80%. This is because of the perception of expanded living space at a reasonable price. Adding a deck costs about 16 $35 per square foot, while a square foot of inside space costs an average of $85. Decks are a great way to increase the play space for a modest cost.
• Convert an attic space into a bedroom: For most homes, the attic is an afterthought. It’s a place where unused craft projects and abandoned hobbies go to die. Turning an existing attic space into a spare bedroom or office, complete with its own bathroom, can be done for a slightly steeper price. Nationally, the average cost is just over $50,000. That includes constructing a room, extending utilities to it, and adjusting the exterior of the house to accommodate the new space. This remodel provides a 77 percent return on investment in resale value, with the potential for more. If you have adult children or relatives visiting from out of town, an attic room can be a wonderful guest room. You could also rent it out for additional income!

When you’re making improvements to your home, you’re not just making your life better in the short term. You’re also making an investment in your future. Ideally, the increase in the value of your home will exceed the cost of the improvement. If the ROI figures scare you, remember that you’re getting value out of the remodel along the way, and that the numbers are skewed by people pursuing projects they love that the next owners might not like. Pretend you’re seeing it for the first time. Do you want to buy it? Why or why not?

Credit Card Debt

Even if you don’t have much credit card debt, a home equity loan or line of credit can reduce your interest rate and bring down your monthly payments. In most cases, the interest on your second mortgage is tax-deductible. Talk about savings!

If you’re considering using this loan to pay off your credit card debt, it’s important to work with a reputable financial institution, because some of the consolidation companies can really harm your credit, and a few are simply scams. With a second mortgage, you can get enough money to pay off your credit cards and get the added benefits of avoiding default, which hurts your credit. This also enables you to keep your revolving credit from your cards available to you for use in a pinch.

In today’s world, you can never be too careful. Professional con artists know getting a second mortgage is something you probably don’t do every day, and they see it as an opportunity to rob borrowers of their money, personal information, or even, in extreme cases, their home. Be alert and watch out for these “classic” scams that return every few years.

Up-Front Cost Refinance

The Scam: You get a phone call or a letter from someone who wants to refinance your mortgage. The scammer offers to cut your monthly payment by hundreds of dollars or help you pay off your mortgage in record time. All you must do is pay a small percentage of those savings up front. The person who contacted you has no intention of refinancing your home. This is a variation on the Nigerian prince scam you’ve probably seen in your email.

How to beat it: It’s illegal to charge up-front fees for mortgage refinancing. Some scammers may try to waffle around this by calling them “document processing” fees or using some other jargon. Whatever they call it, it’s against the law and is a sure sign this “lender” is just looking for a quick payday while not delivering anything in return. While rates can fluctuate over time and from institution to institution, the fluctuation is limited. If someone is offering a rate that is several percentage points lower than anyone else in town, be highly skeptical. Check with the Better Business Bureau to see if the company exists and/or if complaints have been filed against it.

The Fine Print Deed Sign

The Scam: Scammers use a variety of up-front pitches. Some might offer to lower your rate or payment, while others offer a home equity line of credit with alarmingly good terms. They may also offer to take over the deed to your house and then use their superior credit rating to secure a lower rate while allowing you to remain in the home as a renter.

Whatever the pitch, there are many, many forms to sign. All of them are written in indecipherable legalese. Yes, even more undecipherable than the legitimate forms they’re impersonating. Somewhere amid these forms, perhaps buried in the back, is a form signing the deed for your house over to the scammer. Once they have the deed, they can rent the home to someone else or sell it outright while forcing you to vacate. Worst of all, you’re still on the hook for the balance of the mortgage, since the loan is tied to you personally and not to the home.

How To Beat It: Scrutinize every document you sign relating to your mortgage or home. Have your lawyer look at them. After all, that’s why you pay professionals. Spending 20 minutes with a real estate lawyer is expensive, but not as expensive as losing your home. On the other hand, if you’re working with a lender you know and trust, such as your credit union, you can rest assured something like this will never happen. Unless you’re selling your home, there’s no legitimate reason to sign the deed of your house over to someone else. While rent-to-buy schemes aren’t illegal, be sure it’s what you want by checking with a professional before you sign anything.

Home Improvement Scams

The Scam: If you’re looking into a second mortgage to renovate your home, be sure to avoid scammers who stop by and offer to do work around the house. At its heart, it’s one of the oldest scams out there, because it comes down to someone taking money for work, they never intended to perform.

The offer might come from someone who claims to have leftover materials or who says they noticed some missing shingles on your roof when working on your neighbor’s house, and now they have a great deal to offer you. By the time you realize you’re not missing any shingles, the scammers will have cashed the check you gave them. Many of those who have been robbed by home improvement scammers reported it was difficult or impossible to get in touch with the scammer after the initial visit. In many cases, the scammers told homeowners a sad story to explain their lack of cellphone or business card, taking advantage of homeowners’ sympathy to explain why they can’t provide contact information.

How To Beat It: Scammers might claim they need to charge you for materials upfront or they need a hefty deposit to get started, but that’s a red flag. Professional contractors have enough credit to buy materials and usually have accounts at local hardware stores to make billing easier. If the person you’re talking to doesn’t have good enough credit to buy materials, they’re probably not good enough at home repair to be worth your money.

If You Think You’ve Been Scammed

None of this should scare you away from a home equity loan, because most lenders are legitimately looking out for your best interest. However, in today’s world, the reality is there are some things you’ll want to watch out for, and we’ve included a pretty comprehensive list. If you think you might have been the victim of a home improvement scam, let the FTC and your financial institution know immediately. If they find out quickly enough, they may be able to stop the check before the scammers can cash it and keep others from falling for the same scam.

What Can I Do with a Home Equity Loan?

Basically, a home equity loan is going to give you a big lump of cash, and you can do any of three things with it: You can take care of an emergency; you can buy something fun; or you can use it to make money. If you’re looking at a loan to pay for an emergency, then you already know how you’re spending your money. Here are some examples of common ways people use home equity for fun, for profit, or both:

Fun: 

• Buy a vacation home, retirement home, or timeshare. 
• Buy a boat, RV, or other grown-up toys. 
• Renovate that terrible kitchen/bathroom/patio that you just can’t look at anymore. 
• Add luxury to your home, such as an outdoor kitchen, a pool house, or a garage apartment. 

 Profit: 

• Start that small business you’ve been toying with. 
• Take some time off to work on your novel/screenplay. 
• Purchase a rental property. Maybe that vacation home or retirement home can pay for itself. 
• With the low interest rate on first mortgages and home equity loans, many investment portfolios will simply pay you more than your interest rate.

What is a Home Equity Loan?

Home equity loans can be confusing at first.

Equity: Your equity is the amount of your home that you own (the amount that is paid for on your mortgage compared to the appraised market value of that same house). Remember, your home is probably not worth the same amount you paid for it, and any profit belongs to you. On the flip side, if your home has decreased in value since you bought it, that means you have less equity available.

Collateral: When you take out any loan, the lender wants to know they’ll get their money back. Collateral is something you own that the lender can take if you default on your loan. When you borrow against your home equity, you are using your home as collateral.

Types of Home Equity Borrowing

Home Equity Loan: Commonly referred to as a second mortgage, this is the most common form of turning your home equity into usable cash. Usually, the second mortgage is on a fixed and shorter term than the first, although some can last up to 15 years. People usually choose home equity loans when they want a large lump sum of cash.

Home Equity Line of Credit: Unlike home equity loans, which tend to be repaid at a fixed rate for a set amount of time, like a car loan, HELOCs are set up more like a credit card, with a revolving line of credit for smaller purchases that might change every month.

Loan or Line of Credit?

A home equity loan and a home equity line of credit (HELOC) sound very similar, and the process of applying for both is similar, too.

A second mortgage is a loan that’s secured by the value of your home when you still have a first mortgage. If you need a large, fixed amount of money for repairs or other expenses, taking out a second mortgage can allow you to pay for them at a favorable interest rate. This is an option for major planned purchases or for expensive emergencies.

A home equity line of credit is like having a credit card that’s secured by your home. Like a credit card, there is a credit limit. In a home equity loan, the limit is usually pegged to the value of your house and what is still owed on the first mortgage at the time of opening the account. It’s good for a specific term, called a “draw period,” which is generally 10 to 15 years. In many cases, the interest on a HELOC is tax-deductible, but you should confirm that with your trusted tax preparation professional.

If you want a large chunk of money right now, you need a home equity loan. If you need small amounts of money over time, consider a home equity line of credit.

Comparing Lenders

Usually, when you make a shopping decision, you have a pretty good idea how two products differ. With second mortgages, you don’t get the advantage of experience and you don’t have commercials helping you make the decision. It’s also difficult to see how the products differ from one another without doing a lot of math.

• Loan minimum: This is the smallest sum the institution will lend on a home equity loan. If you want less than the minimum, consider a HELOC.
• Loan maximum : This is the largest sum the institution will lend, and it’s usually set at a percentage of your home’s equity.
• Fixed-rate vs. adjustable rate: Just like your first mortgage, your second may have a fixed or adjustable rate, depending on the lender and product. With a HELOC, you can usually only find adjustable rate mortgages, which means your interest rate will change each time the Fed raises or lowers interest rates, though usually not by a significant amount.
• Draw period: The amount of time on which you can draw from your equity, specifically for HELOCs. A draw period is usually between 10 and 15 years.

Moving Beyond the Numbers

There are a variety of other factors to consider when you pick your lender.

• Do you have a relationship with this lender?
• How has their customer service been?
• Are they easy to reach by phone, by email or in person?
• Ask your friends and neighbors about anyone they borrowed from.
• Did you hear positive or negative reviews?
• It’s important not to get swept away by flashy websites or impressive advertising. You’re going to be working with your lender for a long time and you want to be confident that you can trust them.

Getting Help

It’s important to assemble a team of professionals you trust, to make sure you get the best deal and set yourself up for financial success. For many people, the team they assemble for their second mortgage is comprised of the same professionals they use every day, like their lawyer and accountant. You also might want to include a mortgage specialist. The mortgage specialist or mortgage consultant knows all the intricate details of lending regulations in your area, and they’ve seen enough second mortgages to know how to best handle your loan, especially if any special problems arise. Mortgage consultants can also help you set your budget, so you don’t incur more debt than you’re comfortable with or less than you need to accomplish your goals.

Don’t Be Swayed 

Before jumping into meetings with realtors and attending open houses, first-time homebuyers should be realistic about their budgets.

Purchase a home you can afford, not one that stretches you to the limit. The right house allows you to save for retirement, college education, or perhaps your next home purchase, and it ensures you have liquid assets available in case of a medical crisis or a job loss. You never want to be “afraid” of your mortgage.

So, How Much Can You Afford? 

Lenders are often very happy to lend you as much as your debt load allows. But remember, just because someone will lend you more money, it doesn’t mean you should borrow it. Ask yourself, how much house do I really want?

A Wish List… Not Wishful Thinking

Prioritize 

What’s most important in your new home? Proximity to work? A big backyard? An open floor plan? A quiet street? Is it the number of bedrooms or bathrooms? What about other amenities like an attached garage or a pool? Local schools?

Beautiful Day in The Neighborhood 

No matter where you’re looking to buy a home, it’s important to look what other homes in that area sold for recently. 

Talk to The Neighbors 

Speaking with neighbors can give you a more intimate sense of a property or area.

Think About Demographics

If you’re buying in a neighborhood that is full of renters, it only takes a few bad ones (or bad landlords) to drive the neighborhood and property values down. If the neighborhood is full of single people, will you be happy there if you have very young kids?

Look Around 

If you think you’ve found the neighborhood you want to buy in, take it a step further. Drive from your potential new home to your office to see what the commute is like, as well as to places you’d go on a regular basis, like the grocery store, gym and gas station.

A Final Thought: Buying a home, especially for the first time, is both scary and exciting. Spend a little time before you start searching, though.

In the first part of this blog series, First-Time Homebuyers: Get Yourself Ready, we walked you through the decision of whether you’re ready to buy a new home right now or not. In part two, we’ll discuss the real costs of buying home and how to build the best home-buying team.

Know the Real Cost 

When budgeting for a new home, look at all the expenses associated with it. Just as you’d add up gas, oil, insurance, mechanics’ fees, and car washes when buying a new automobile, you need to look beyond the price of a house when buying a new home.

Don’t stop with principal and interest; add in utilities, the cost of commuting, and future upgrades. Call the utility companies that services the house you are considering and ask for an estimate of what the cost will be, whether there are any budget plans available, etc. Will the gas budget for your car go up if you are moving farther away from the places you frequently visit? 

Add 3% to 6% more for closing costs, which will vary based on where you live and what taxes your state and city require you to pay. And if you’ll be joining a home-owners association (HOA), ask to see the contract. You’ll want to know about all rules and restrictions, from pet ownership to who can use the pool. Fees can be as low as $0 or as high as several hundred dollars per month, depending on the amenities and services offered. That could easily turn an $800 mortgage payment into an $1,100 one.

Research Your Mortgage Options 

The lending pros at your credit union can help you investigate all your mortgage options and pick the one that’s right for your situation. Think about your long-term plan when you’re exploring these. You might be one of those people who never plans to buy another home, so maybe you’re more interested in a 30-year, fixed-rate mortgage. Another couple might look at this home as a starter property that they only want to own until their second child is born. Thus, they might want an adjustable-rate mortgage.

Pick Your Team 

In addition to your credit union loan adviser, you’ll need people with the right stuff all along the way. 

• Real Estate Agent 
  • Your real estate agent is your insider to the world of homebuying, and the right one can be an invaluable asset when buying your home.
• Home Inspector 
  • A knowledgeable home inspector is just as important as a great real estate agent. Getting a home inspection can save you thousands of dollars in the long run, but it must be thorough.

Are you looking for even more essential information for buying your first home? Continue on to part three of our homebuying series: First-Time HomeBuyers: Know Your Budget.

Buying a house is one of the biggest decisions, financially and emotionally, you’ll ever make. Many first-time homebuyers are age 34 and younger. Whatever age group you fit into, you’re not alone if you’re considering buying your first home. Maybe you’ve been renting and need more space, or you feel ready for a long-term commitment, financially and otherwise. 

If you’re still in the process of making that decision, the New York Times has an excellent, interactive “Rent Vs. Buy” calculator that might help put things in perspective.

Are You Ready? In addition to asking yourself that question about finances, consider how ready you are in terms of emotions. When you’re renting, remember that surprises don’t require a lot of emotional investment. Rent goes up? You can move. Stove on the fritz? Crabgrass out of hand? The landlord will send someone over. Homeownership is different, though. If the furnace breaks or property taxes rise, it’s on you. That’s a potential financial burden, but experts point out that there’s a mental and emotional cost, too. Everything can go perfectly smoothly for months, and then four maintenance issues might spring up in the same week. Stress management and problem-solving skills are among the tools a homeowner needs, right alongside a lender they know they can trust.

Getting Yourself Ready 

Get Your Finances in Order

Some real estate agents won’t even show homes to prospective clients who don’t have a mortgage preapproval. Meet with your lender at the start of the process to find out how much house you can afford and how much cash you’ll need to close. (More on this in a moment.) 

Attend A First-Time Homebuyers Seminar

Your credit union may offer a seminar, and if not, can advise you on signing up for one that’s possibly given by a city housing department or a non-profit organization. Why not take a little time to learn from the pros? Many of the seminars are free. However, any nominal fee will be repaid many times in valuable knowledge. 

Make A Down Payment Plan 

Most conventional mortgages require a minimum down payment of 5% to 7% of the cost of the home, but some range as high as 20%. Your best bet is to check with your credit union loan pros and investigate all the options. 

Check Your Credit Score 

Get a copy of your credit report at www.annualcreditreport.com. The three credit bureaus (Equifax, Experian and TransUnion) are each required to give you a free credit report once a year. 

Want to know the next steps in the homebuying process? Check out part two of this blog series: First-Time Homebuyers: Your Budget & Team