TSB Money Matters

Navigating Home Equity: Choosing Between HELOCs and Loans for Your Financial Future

• The Savings Bank • Season 1 • Episode 8

Share episode

Send us a text

Unlock the secrets to making informed decisions between home equity lines of credit and home equity loans with insights from Jeff D'Alessandro and Mario Giamei. We'll guide you through the complex landscape of these financial tools, providing clarity on how each option can align with your unique financial goals. Learn how current interest rates and economic conditions are crucial in determining whether a flexible HELOC or a fixed-rate loan is right for you. With engaging examples, such as long-term renovations or large purchases, you'll discover the nuances of each product and how they fit into your financial strategy.

Join us as we dissect the similarities and differences in these home equity products' documentation processes, costs, and timelines. With a detailed look at how shifts in the prime rate influence borrower preferences, this episode highlights why understanding these options is essential, especially since they are exclusive to owner-occupied or second homes. As interest rates fluctuate, we discuss scenarios where a line of credit might be more advantageous, even with the allure of fixed rates. Whether contemplating a one-time project or preparing for unexpected expenses, this conversation ensures you make well-informed decisions tailored to your financial aspirations.

The TSB Money Matter Podcast is produced by The Savings Bank, a community bank headquartered in Wakefield, Massachusetts. The information presented is for informational purposes and should not be considered financial, legal or tax advice. Consult with a banker or financial advisor about your personal or business finances.

Member FDIC. Member DIF. Equal Housing Lender.

Visit us at www.tsbdirect.bank

Ally Houghton:

Welcome to TSB Money Matters, where we dive deep into the dynamic world of banking, finance and everything in between. I'm your host, allie Houghton, and we'll tackle topics including landscapes of financial institutions, economic trends and the ever-evolving technologies shaping the future of banking. Today, my guests are Jeff D'Alessandro and Mario Gimay from the Retail Lending Department at the Savings Bank.

Mario Giamei:

Today, we'll be going over the differences between home equity lines and home equity loans and what may be working better for you. Thank you both for joining us today. Thanks for having us, Allie, Thanks Allie. So today I thought we'd hit on kind of a throwdown that we get often, and this is equity line versus equity loan Right and it's a very frequently asked question that we get here at the bank, and so I thought we'd go over the merits of both and, you know, kind of give some key information for each piece.

Jeff D'Alessandro:

Yeah, I mean different times throughout the year and throughout you know cycles of years, one product's going to be more popular over other products and oftentimes people say what's better, the line of credit or the equity loan? And it really depends one on the situation and two on the market sometimes what rates or different rates are.

Mario Giamei:

Yeah, so I think we'll start off with the equity line and just preface that with. Typically, an equity line is based on prime rate. Most institutions base that rate off of prime or some variation of prime plus something, prime minus something and so, depending on the economic environment and where prime rate sits, that rate is going to change over time that you have that equity line of credit, whereas a fixed rate equity loan is just that it has a fixed rate attached. That rate will not waver through the life of the loan.

Jeff D'Alessandro:

Right. And then the line of credit. We call that an open-ended mortgage because it's really. To me, a line of credit is just like a big credit card, although we issue a checkbook instead of a credit card. It's really the same idea. You don't borrow the money today. You get approved for as much money as you want to borrow, but you don't have to access the money until you need it.

Mario Giamei:

Very much like a credit, as you want to borrow, but you don't have to access the money until you need it.

Jeff D'Alessandro:

Right, very much like a credit card. You use those funds as you see fit Versus the loan. We call it closed-end loan. The money is issued on the fourth business day after the closing, which is a guideline, where when someone borrows in the home they live in, they have three business day right to cancel the whole process and on the fourth business day we issue all funds and they start making payments immediately on that closed-end loan Right.

Mario Giamei:

So that's the first key comparison is repayment. Fixed-rate equity loan you're repaying from the get-go, Whereas on an equity line, as Mario mentioned, it's somewhat similar to a credit card scenario where you pay on what you use. Right.

Jeff D'Alessandro:

And, more importantly, the equity loan. You borrow the money, you pay it back. You're done With an equity line of credit. We call a home equity line of credit that product. You can access the money, pay it off. Access the money again, pay it off.

Mario Giamei:

Access in different increments, simply paying down your balance and you always have that availability.

Jeff D'Alessandro:

Right for a 10-year period, correct. And then at the end of 10 years, if you have a balance, we give you 10 more years to pay that balance off, but the line is no longer open to further charges. Or if you have a zero balance at year 10, the line closes and is dissolved. Essentially, yes, so depending on need.

Mario Giamei:

So the scenario would be okay I'm doing a long-term renovation project. I don't need all the money up front. I'm going to do this over a period of a few years, incrementally. So in those scenarios, when you hear that, when you are discussing with the bar which way are you typically leaning with that customer?

Jeff D'Alessandro:

Right. So I think for the most part. If that's the scenario where they say I think for the most part if that's the scenario where they say I have a project in mind but I don't want to do everything right away, that is where we lean toward the line of credit, not necessarily a hundred percent, but probably 80%, because in that scenario a person may need, for example, $100,000, but they only want to access 20 today, or none today and they're going to. A year from now they're going to do the roof and another year from now they're doing something else. Or there's an addition or a project that's not going to start until the spring, but they want to have their financing in place. That's when they go to the line of credit. If they have a one-time project or a debt consolidation, or they might be shopping for something a boat or a car or a second home if that's their plan is oftentimes well, the second home might be another situation where you want a line of credit because you're not. You're shopping and it may be six months before you find the right second home. But for everything else that I mentioned the debt consolidation, investing in something, those types of things you probably want the fixed rate equity loan because one.

Jeff D'Alessandro:

Right now the rate is better. Typically our fixed rate APRs on our 15-year loan for any amount up to $75,000 is in the sixes. And even if we do a 20-year loan, which is for any amount over $75,000, you can still do a 15-year loan, but you can do a 20-year option in the sixes as well. And those are fixed rates Versus the line of credit. Right now it's prime minus 1.5% and right now that means prime rate is at 8%. So the line of credit rate is 7.5% as an APR. It can go as low as 2.75% and it can go as high as 18%.

Mario Giamei:

It can go as low as 2.75% and it can go as high as 18%. And we get that question all the time why is there such a range? Well, prime rate can do anything over a 20. The duration of these loans can be on a HELOC can be 20 years. It's 10 years to play with the line, access it however you wish, and then the 10-year repayment. So the opportunity for the prime rate to change is certainly a fairly large window and it does change. We've learned this over the recent few years.

Jeff D'Alessandro:

I mean, look, it's been a long time since it's been 18%. I think that's probably going into the 80s. Oh, of course.

Mario Giamei:

But just to see the massive swing in the prime rate. And, of course, the clients that have had existing equity lines in place. You see those payments fluctuate. So the benefit of the fixed rate equity loan is that that payment is not going to fluctuate and in this climate, presently, as we sit here today, that fixed rate equity loan certainly has a more beneficial payment to it, and one that won't waver.

Jeff D'Alessandro:

Right, exactly. And the other thing is for a line of credit. You know, look, if you only have a small amount out, you have a $100,000, $150,000 line of credit and you've only accessed $10,000, you're only paying on the $10,000 portion. Yes, again, like a credit card, there's a minimum payment, always when you have a balance of $100 minimum. But we're typically it's going to be with us we don't have an interest-only option because we think it's dangerous for people to just pay interest for 10 years and then walk into the bank and say I still owe $100,000. I've had this thing for 10 years. How did that happen? So we have a payment structure set up where you're going to pay the monthly interest plus a percentage of the balance that you have. Much again, like a credit card. It really does mimic a credit card. It really does mimic a credit card in a lot of ways.

Mario Giamei:

I think we do believe in attacking that principal balance at some point. While interest-only loans certainly have their place in the market and for the right scenario it might be the right cause and right product, but for the most part sound, you don't want to wake up in 10 years and say, geez, I've been kind of paying this for a long time and my balance hasn't changed. I think having again some ability to make a dent into that principle is great. So, again, the frequently asked question is which one's?

Mario Giamei:

best for me, as Mario mentioned, it's always scenario specific, but if you have the need right away for those funds, I think certainly the fixed rate equity is the way to go presently.

Jeff D'Alessandro:

The key words for me are always if it's a one-time use situation to me and that doesn't mean I'm right, but I always ask that as maybe a point of advice. I don't like to give advice because, as I always say, everyone that's coming to me is typically over 18 or over 21, has the right to do what they want. But in a one-use situation, right now, you're better off rate-wise with the fixed-rate equity loan. Right now you're better off rate-wise with the fixed-rate equity loan. And if you need to become more agile in the future, let's say rates go down. You can refinance the equity loan with no prepayment penalty. You can switch to a line of credit with no prepayment penalty, but we do have to go through a new process. It's a new loan.

Mario Giamei:

At that point, but you have the ability for a very small amount.

Jeff D'Alessandro:

There's very little downside to refinancing. We do have small closing costs and we do have to charge those again, maybe in three years. But if you're going to go from six and a quarter to four or something like that and an interest rate, it's certainly well worth your time to do that. Or you can again switch to an equity line of credit. Having an equity line of credit first is great when you don't need to borrow the money. But again, if the line of credit goes up, fixed rates might go up and then you don't have any opportunity to get into that lower fixed rate product. It's lower than the new rate you have. For example, let's say the rate goes from seven and a half right now to 10, that fixed rate might go up to eight. And so now, instead of being at six and a half or six whatever the number is in the sixes, you're now at eight. So you've lost out on something.

Jeff D'Alessandro:

For a one-time use the line of credit does have again you have to, you know, if you keep that open.

Jeff D'Alessandro:

It has a $25 annual fee, which is very small by comparison to 99% of our competition charges something, I think and they're usually around $75 or so. So we have a small $25 annual fee, small closing costs and of course you know again, it's access that you can have over and over again in different ways. But the fixed rate loan for one use type projects you say I've already got my builder in place it's going to cost us X amount of dollars to do what we want to do. So we're going to borrow X amount of dollars. Fixed-rate equity loan is a great way to go. I might also add in those situations just as an aside, getting a little off topic make sure you borrow enough, because you'll find that you can't borrow any more money if you're in mid-construction down the road. So you want to make sure you either have a buffer in your bone bank account or you have enough, because you can always apply the difference back onto the principal balance and pay the principal balance down.

Mario Giamei:

Yeah, that's key. Any principal reduction is always welcome at any time, right, you know? I think the other piece to talk about is in terms of comparison is the timeline. Is the same for?

Ally Houghton:

both loans, they close relatively quickly.

Mario Giamei:

A lot more.

Jeff D'Alessandro:

You know as far as documentation same as on both products. Yeah, it's very similar to a mortgage, almost in the documentation. In most cases it's similar. Obviously there's stuff we don't need from, like the purchase side, but we're going to need similar documentation to our first mortgage refinance. We probably can close the line of credit slightly quicker because there's different regulations for fixed rate equity loans where we actually have to do a little more in terms of we have to count out cooling off periods and equity loans that we don't have.

Mario Giamei:

On lines of credit. It's a bit different.

Jeff D'Alessandro:

But for the most part they're very similar. We try to in good times we try to get them done in a couple of weeks to three weeks. We're paying for the appraisal. When we do the exterior only appraisal, which most of the time we're doing what's called an exterior only or drive-by appraisal, the bank pays for that for the borrower and that means they don't have to schedule with the borrower, they can just go outside the house, take a couple of pictures.

Mario Giamei:

Yeah, and the cost is on the bank, and so what I want to stress on both of these, you know, equity line versus equity loan is similar costs. Nothing really changes there. The timeline is about the same. Documentation is the same, so you're really dealing with the, you know, nothing's really changing for the consumer other than their selection. You know, and again, depending on the rate, environment, like, for example, you know you dial back five, six years ago.

Ally Houghton:

It was HELOC all the time.

Mario Giamei:

The prime rate was low, prime minus a half. It was very attractive to borrowers. No one even thought of a fixed rate equity loan because the rate was seemingly at the time prohibitive. You turn the page now, when the economic environment is now different.

Ally Houghton:

Prime rate is much higher different.

Mario Giamei:

Prime rate is much higher and a product that has been available for some years and years has become very much popular and useful simply because the rate is no longer prohibitive. It's now attractive and it's a fixed rate payment that someone can budget for confidently.

Jeff D'Alessandro:

Yeah, it's ironic because you're right, just a few years ago it was well, we have equity loans, but right now the line of credit's at three or something like that. And people it was well, we have equity loans, but right now the line of credit's at three or something like that. And people, yeah well, I want that. And now it's like well, we have the line of credit, but the lower rate. If you want the lower rate, it's with the equity loan.

Jeff D'Alessandro:

And oftentimes people, oftentimes people be on our website and see the fixed rate equity loans and think that applies to the line of credit. So we have to, you know, educate them and we want to make sure that we talk about all that stuff upfront. It's the type of things that I know I talk about upfront, instantly. Let's make sure you're on the same product, because sometimes you can look at the website and, as we try to make it as clear as possible, it can still get confusing to folks. And I also want to point out, by the way, that, unlike first mortgage products, equity loans and equity lines of credit are only available if you live in the property or it's a second home, correct. We can't do investment property versus the first mortgage products. We can lend on investment properties in certain situations. Please call us on those, but this is only for owner-occupied properties.

Mario Giamei:

I also, as you were talking about that. Yes, so they are owner-occupied residents.

Mario Giamei:

The other piece I wanted to get into real quickly is we've had plenty of examples where you know we talk about scenario-specific, but because the rate is so much better on the fixed-rate equity loan, right now that you will find examples where a client will, even if they don't have the need immediately, where typically the HELOC, the premise of the product may be more attractive, the fact that the rate is so much better that they will go ahead and still do the equity loan and they'll put those funds in savings and use them as needed.

Jeff D'Alessandro:

And it's funny, you're right. Except I will say now that the rate has come down ever so slightly. The conversations are closer to 50-50 since they came down a little bit. We were at 8% until very recently and the Federal Reserve lowered the prime rate, so our rate came down because it's prime minus a half the prime rate's at 8, and now our HELOC rate is 7.5%. That's getting them closer to saying hmm Well, you bring up a great point.

Mario Giamei:

Depending on if there's a lot of talk about where the Fed goes from here, a lot of projected future cuts, potentially one right on the horizon as the prime rate does potentially tick down. That makes this conversation.

Mario Giamei:

It changes the narrative a bit, simply because now you're really looking at scenario, because if the rate is about the same, or getting in the same ballpark, you say well, you know what, I know the rate on like. I'll give you an example. The rate on the fixed rate equity loan is marginally more attractive. However, I really don't need that money today.

Jeff D'Alessandro:

Exactly or.

Mario Giamei:

I just want to have something in my back pocket If an emergency comes up, you know. I have an auto, an unforeseen auto expense, the water heater goes. You know, I have an auto, an unforeseen auto expense, the water heater goes, something where you need immediate money.

Jeff D'Alessandro:

My roof is 30 years old and I think in a few years I'm going to need to get it done, and I want to make sure I don't have to scramble. So now I'm going to get a line of credit. Have those funds available, and the day that the roof starts leaking, I can call the roofer and get them out there.

Mario Giamei:

Right, so if the does soften and does you know is you know, again there's projections all over the place so you can go wherever you feel comfortable. And whether or not that really happens, the Fed reacts. It depends. But if as you know what many people think. You know further reductions are in play. You will see those products now become a little bit closer in terms of rate and now you really have a little bit more, your need becomes a little bit more of a deciding factor.

Mario Giamei:

Yeah, absolutely, I think, as we stand, today the fixed rate equity loan, far better rate or considerably better rate.

Jeff D'Alessandro:

And look, jeff, as the HELOC rate goes down, we might well lower the fixed rate equity loans. We don't know that either. Everything is different and the products. What people always need to understand is not every product is tied to the Federal Reserve, or some things are tied to bond markets and different things.

Mario Giamei:

Yeah, exactly, I'm talking about the prime rate only, right.

Jeff D'Alessandro:

We could see the equity loans. We could see home equity lines go down in rate and equity loans could still go up or they could follow suit and go down as well. So the future is something that we just can't predict. Where we are today, the equity lines of credits are certainly a little bit higher and the volatility that has been there recently A lot of folks out there who will watch this will know they may have taken out a line of credit three or four years ago and they had a three or a three and a half percent rate and now all of a sudden they're at eight percent.

Jeff D'Alessandro:

So projects they wanted to do they might be on hold. Or they're coming back to us now and say, hey, I took out that line of credit, but now I want to get the equity loan instead because I'm ready to go, but I want the lower rate and so we can still flip that product for them and take care of that and move it. You know you're not locked into these things, potentially permanently, if you need to be more agile in a couple of years.

Mario Giamei:

They're low-cost transactions. You're able to be flexible. And you know you're not paying the cost of a refinance transaction.

Ally Houghton:

And one piece.

Mario Giamei:

I think that's really critical that we didn't touch upon yet and before we wrap up, I think it's important that we do is that these lines in fixed rate equity loans have become really, really popular for a key reason so many folks have refinanced at really low, low rates over the past handful of years Absolutely. There is no incentive to lose that rate by refinance. So if you have a need for tapping into the equity of your property, a cash out refinance doesn't make nearly the sense. An equity line or an equity loan does.

Jeff D'Alessandro:

Right, and one more thing I also will point out before we wrap up is if you're a town employee in our CRA towns, we have significant discounts for town employees and you'll see those on our website. The 12 cities and towns yeah, it's a great piece for rate.

Mario Giamei:

It's wonderful, so yeah.

Ally Houghton:

so what we did, you know again, we wanted to throw out those the we get this frequently asked question which is better again need driven as of right now rate is leaning towards the fixed rate equity loan I always want to have like an end to the throw down.

Mario Giamei:

Like who? Wins, but they again, depending on your, on your need, they're both viable products. Uh, if it's strictly rate, I would say fixed rate equity alone today, right?

Jeff D'Alessandro:

Well, look, and this is what I always say, whatever podcast we do, it's always best to give us a call and talk about it, because every situation's different and we're able to advise potentially on what might be better, or at least give the options. I don't think my job is to advise, but at least give the clear options and make people understand what the differences are. So call us and we'll talk about it, and you may start out saying I want the line of credit and you might end with the equity loan, or vice versa.

Mario Giamei:

So great, all right, fantastic Thanks.

Ally Houghton:

Well, thank you all for that great information, and I think that's an interesting point of how something might work better for one person and the other loan may work best for someone else. So, and I want to thank everybody for listening today and we will be back soon with another edition of TSB Money Matters.

People on this episode

Head Shot

Ally Houghton

Host