Home Equity Borrowing
If you need to borrow, a home equity loan usually offers the best rates, plus the advantage of tax savings.
Home equity loans let you borrow using the equity you've built up in your home as collateral. You can often borrow more money at a lower interest rate than with other types of loans. And, in many cases, you can deduct the interest you pay on the loan when you file your tax return, reducing the actual cost of borrowing still further. Most of the other interest you pay, on car loans or personal loans, for example, isn't deductible. You can choose between:
Home equity loans, sometimes known as second mortgages
Home equity lines of credit, sometimes called HELOCs
ATTRACTIONS
They are easy to arrange
The rates are usually lower than on unsecured loans
The interest is tax deductible, though there may be a cap and other restrictions (check with your tax adviser)
DANGERS
You risk losing your home if you default on the payments
Even if the value of your house decreases, the amount of your loan stays the same
You may have to pay high closing costs
HOME EQUITY LOANS
With a home equity loan, you borrow a lump sum, usually at a variable rate of interest although some fixed-rate loans are available. You pay off the debt in installments, in the same way you repay your mortgage, with some of each payment going toward the interest you owe and the rest toward the principal, or loan amount. At the conclusion of the payment period, the loan is retired.
You may have to pay closing costs on your loan, just as you did for your first, or primary, mortgage. But lenders may offer loans with no up-front expenses as part of a promotional deal. You might also be offered a teaser rate, or a period of low interest as an incentive to borrow. If that's the case, the lender has to tell you the actual cost, or annual percentage rate (APR), and when the temporary rate ends.
HOME EQUITY LINES OF CREDIT
Home equity lines of credit are actually revolving credit arrangements, which you can use in much the same way you use a credit card. Your credit line, or limit, is fixed, and you can write a check for any amount up to that limit. Whatever you borrow reduces what's available until you repay. Then you can use the repaid amount again.
The terms of repayment vary with the loan and are spelled out in your agreement. In some cases you begin to repay principal and interest as soon as you borrow, or activate the line. In others, you pay interest only, with a balloon, or one-time full payment of principal at some set date. Or, you may make interest-only payments for a specific period, and then begin to pay principal as well.
Most credit lines have an access period, often five to ten years, during which you can borrow, and a longer payback period. The longer you take to repay, the more expensive it is to borrow.
WHAT YOU CAN BORROW
As a general rule, you can borrow up to 80% of your equity in your home with a home equity loan. For example, if you had a $75,000 mortgage on a home appraised at $250,000, your equity would be $175,000. In most cases, you'd be able to borrow up to $140,000, or 80% of $175,000.
Some home equity lines of credit, especially those offered without closing costs or other up-front expenses are capped at a fixed amount, such as $50,000. Each time you use your line of credit, your equity is reduced by the amount you owe. When it's paid off, your equity is restored. However, if your home loses some of its value during the loan period, you still owe the full amount you borrowed.
BEWARE THE RISK
While home equity borrowing has a lot of advantages, it has one serious drawback: If you default, or fall behind on repayment, you could lose your home through foreclosure. That means the lender has the right to take over the property. That's true even if you've made all the payments on your first, or primary, mortgage.
FINDING A LOAN
Home equity loans are generally easy to find. Banks offer them, and so do credit unions, mortgage bankers, brokerage houses, and insurance companies.
You can start by checking rates and terms advertised in the newspaper and making some phone calls to see what's available. But before you commit yourself, you should get a description — in writing — of the specific rate, term, and other conditions of the loan you have decided to take.
SETTING THE RATE
Each lender sets the terms and conditions of loans it makes, though the basic elements are usually similar. If a home equity line of credit has a variable rate, it must be tied, or pegged, to a specific public index, often the prime rate, rather than to some internal index that the bank controls. Most home equity installment loan rates are also tied to an index, though federal law doesn't require it for this type of loan.
The lender adds a margin, expressed as basis points, or hundredths of a percentage point, to the index to determine the new rate each time it's adjusted. It may happen once a year or sometimes more often.
REVERSE MORTGAGES
For older people with lots of equity but limited income, a reverse mortgage may be an appealing alternative to selling their homes or depending on family members to meet their bills. A reverse mortgage allows owners to borrow against the value of their home, either by getting a regular monthly check (either for a fixed term or for as long as they live in the home), a line of credit, or some combination.
You can arrange for reverse mortgages through individual lenders, the Home Equity Conversion Mortgage program of the Federal Housing Administration (FHA), or Fannie Mae. The amount you can borrow depends on your home's market value, your age, and the cost of the loan. In addition, some lenders impose caps on the amount they will lend.
While interest rates quoted on reverse mortgages can be similar to those for other mortgages, there are additional fees and charges that can make them more expensive than other types of loans. Lenders must provide a Total Annual Loan Cost disclosure form that estimates the average annual cost as an interest rate, or percentage of the loan.
As competition among lenders grows, borrowers may be able to arrange better deals on reverse mortgages. But many people have serious reservations about the wisdom of borrowing in this way.
Sunday, September 23, 2007
How Much Funds Will You Need With Equity Lines of Credit?
An excellent source for revolving funds are home equity lines of credit. With these financial products you can obtain all the funds you need at a competitive rate without worrying whether you can afford fixed monthly payments. Besides, just like home equity loans, home equity lines of credit have many benefits over personal unsecured loans that turn them into a much better option.
In order to decide whether home equity lines of credit are the right financial product for you, you need to understand how they work. But first, you should also be familiar with personal unsecured loans and home equity loans so you can knowingly compare what each of these products have to offer.
Personal Unsecured Loans
Personal unsecured loans are not easy to qualify for, they require a good credit history mainly due to their unsecured nature. The only guarantee of repayment that the lender has is your credit worthiness. There are however, some lenders that might approve you for an unsecured personal loan even with bad credit or no credit at all.
Nevertheless, if approved for an unsecured personal loan, the interest rate will depend on your credit score. Unsecured loans carry higher interest rates than secured loans and if your credit score is less than perfect, then you’ll have to face even higher rates making these loans a really expensive financial product.
Personal Unsecured Loan Amounts
For the same reasons, personal unsecured loans offer only small loan amounts. The risk involved in these transactions makes the lenders try to endanger the least amount of money possible. Thus, these loans come only in small amounts that rarely exceed amounts of $10,000 or $20,000.
Moreover, when loan amounts are that high, the interest rate charged tends to be even higher. Besides, the loan repayment program is limited which implies you’ll have to repay the loan in short periods of time. Unfortunately, this means that the amount of the monthly payments will be high enough to put in jeopardy the loan affordability.
Home Equity Loans & Lines of Credit
Home equity loans on the other hand, carry lower interest rates due to their unsecured nature. Given that home equity lines of credit share this nature, they also carry lower rates. However, the interest rate charged by lines of credit is slightly higher than that of home equity loans and the rate is also variable while on home equity loans it can be either fixed or variable.
The amount you can obtain from home equity loans and lines of credit is significantly higher. You can request any loan amount up to the remaining equity on your home though, unless you have perfect credit you won’t be able to obtain 100% financing on your equity’s value. As a plus, home equity lines of credit offer revolving funds. Thus, if you repay a portion of the money you requested you can withdraw it again whenever you need it. That’s why home equity lines of credit are a perfect solution for those seeking flexibility and cheap financing at the same time.
In order to decide whether home equity lines of credit are the right financial product for you, you need to understand how they work. But first, you should also be familiar with personal unsecured loans and home equity loans so you can knowingly compare what each of these products have to offer.
Personal Unsecured Loans
Personal unsecured loans are not easy to qualify for, they require a good credit history mainly due to their unsecured nature. The only guarantee of repayment that the lender has is your credit worthiness. There are however, some lenders that might approve you for an unsecured personal loan even with bad credit or no credit at all.
Nevertheless, if approved for an unsecured personal loan, the interest rate will depend on your credit score. Unsecured loans carry higher interest rates than secured loans and if your credit score is less than perfect, then you’ll have to face even higher rates making these loans a really expensive financial product.
Personal Unsecured Loan Amounts
For the same reasons, personal unsecured loans offer only small loan amounts. The risk involved in these transactions makes the lenders try to endanger the least amount of money possible. Thus, these loans come only in small amounts that rarely exceed amounts of $10,000 or $20,000.
Moreover, when loan amounts are that high, the interest rate charged tends to be even higher. Besides, the loan repayment program is limited which implies you’ll have to repay the loan in short periods of time. Unfortunately, this means that the amount of the monthly payments will be high enough to put in jeopardy the loan affordability.
Home Equity Loans & Lines of Credit
Home equity loans on the other hand, carry lower interest rates due to their unsecured nature. Given that home equity lines of credit share this nature, they also carry lower rates. However, the interest rate charged by lines of credit is slightly higher than that of home equity loans and the rate is also variable while on home equity loans it can be either fixed or variable.
The amount you can obtain from home equity loans and lines of credit is significantly higher. You can request any loan amount up to the remaining equity on your home though, unless you have perfect credit you won’t be able to obtain 100% financing on your equity’s value. As a plus, home equity lines of credit offer revolving funds. Thus, if you repay a portion of the money you requested you can withdraw it again whenever you need it. That’s why home equity lines of credit are a perfect solution for those seeking flexibility and cheap financing at the same time.
How Much Funds Will You Need With Equity Lines of Credit!
An excellent source for revolving funds are home equity lines of credit. With these financial products you can obtain all the funds you need at a competitive rate without worrying whether you can afford fixed monthly payments. Besides, just like home equity loans, home equity lines of credit have many benefits over personal unsecured loans that turn them into a much better option.
In order to decide whether home equity lines of credit are the right financial product for you, you need to understand how they work. But first, you should also be familiar with personal unsecured loans and home equity loans so you can knowingly compare what each of these products have to offer.
Personal Unsecured Loans
Personal unsecured loans are not easy to qualify for, they require a good credit history mainly due to their unsecured nature. The only guarantee of repayment that the lender has is your credit worthiness. There are however, some lenders that might approve you for an unsecured personal loan even with bad credit or no credit at all.
Nevertheless, if approved for an unsecured personal loan, the interest rate will depend on your credit score. Unsecured loans carry higher interest rates than secured loans and if your credit score is less than perfect, then you’ll have to face even higher rates making these loans a really expensive financial product.
Personal Unsecured Loan Amounts
For the same reasons, personal unsecured loans offer only small loan amounts. The risk involved in these transactions makes the lenders try to endanger the least amount of money possible. Thus, these loans come only in small amounts that rarely exceed amounts of $10,000 or $20,000.
Moreover, when loan amounts are that high, the interest rate charged tends to be even higher. Besides, the loan repayment program is limited which implies you’ll have to repay the loan in short periods of time. Unfortunately, this means that the amount of the monthly payments will be high enough to put in jeopardy the loan affordability.
Home Equity Loans & Lines of Credit
Home equity loans on the other hand, carry lower interest rates due to their unsecured nature. Given that home equity lines of credit share this nature, they also carry lower rates. However, the interest rate charged by lines of credit is slightly higher than that of home equity loans and the rate is also variable while on home equity loans it can be either fixed or variable.
The amount you can obtain from home equity loans and lines of credit is significantly higher. You can request any loan amount up to the remaining equity on your home though, unless you have perfect credit you won’t be able to obtain 100% financing on your equity’s value. As a plus, home equity lines of credit offer revolving funds. Thus, if you repay a portion of the money you requested you can withdraw it again whenever you need it. That’s why home equity lines of credit are a perfect solution for those seeking flexibility and cheap financing at the same time.
In order to decide whether home equity lines of credit are the right financial product for you, you need to understand how they work. But first, you should also be familiar with personal unsecured loans and home equity loans so you can knowingly compare what each of these products have to offer.
Personal Unsecured Loans
Personal unsecured loans are not easy to qualify for, they require a good credit history mainly due to their unsecured nature. The only guarantee of repayment that the lender has is your credit worthiness. There are however, some lenders that might approve you for an unsecured personal loan even with bad credit or no credit at all.
Nevertheless, if approved for an unsecured personal loan, the interest rate will depend on your credit score. Unsecured loans carry higher interest rates than secured loans and if your credit score is less than perfect, then you’ll have to face even higher rates making these loans a really expensive financial product.
Personal Unsecured Loan Amounts
For the same reasons, personal unsecured loans offer only small loan amounts. The risk involved in these transactions makes the lenders try to endanger the least amount of money possible. Thus, these loans come only in small amounts that rarely exceed amounts of $10,000 or $20,000.
Moreover, when loan amounts are that high, the interest rate charged tends to be even higher. Besides, the loan repayment program is limited which implies you’ll have to repay the loan in short periods of time. Unfortunately, this means that the amount of the monthly payments will be high enough to put in jeopardy the loan affordability.
Home Equity Loans & Lines of Credit
Home equity loans on the other hand, carry lower interest rates due to their unsecured nature. Given that home equity lines of credit share this nature, they also carry lower rates. However, the interest rate charged by lines of credit is slightly higher than that of home equity loans and the rate is also variable while on home equity loans it can be either fixed or variable.
The amount you can obtain from home equity loans and lines of credit is significantly higher. You can request any loan amount up to the remaining equity on your home though, unless you have perfect credit you won’t be able to obtain 100% financing on your equity’s value. As a plus, home equity lines of credit offer revolving funds. Thus, if you repay a portion of the money you requested you can withdraw it again whenever you need it. That’s why home equity lines of credit are a perfect solution for those seeking flexibility and cheap financing at the same time.
Home Equity Lines Of Credits
improvements, a long awaited vacation or a new car? Whether you have any equity or not, you may be able to take advantage of borrowing opportunities that did not exist one year ago.
Equity is defined as the value in your home, and is calculated by subtracting all outstanding mortgages from the market value of the home. Because loan balances and housing prices are changing constantly, the equity that home owners fluctuates as well. Lenders are less concerned with the exact dollar amount of equity in a home than the percentage of equity. For example, a home owner with a $500,000 mortgage on a $525,000 home has $25,000 in dollar equity but less than 5% in percentage terms. On the other hand, the owner of a $60,000 condominium with a first mortgage of only $40,000 has $20,000 in equity which is 33% on a percentage basis. Lenders would prefer to lend additional funds to the condominium owner because of the higher percentage of equity.
In is important to understand equity percentages because the maximum percentage of combined loan to value on a property is what has changed dramatically over the past two years. In the past, nearly all second mortgage lenders would not let the combined total of a borrower's first and second mortgage exceed 80% to 90% of the value of the property. A home owner with a $100,000 home and a $70,000 first mortgage could only borrow $10,000 (80% of $100,000 = $80,000 - $70,000 = $10,000). Today, that same home owner could not only borrow $30,000, the entire amount of the equity in the property, but could also borrow up to 125% of the value of the home. Unbelievable as it may sound, the borrower in the above example could actually obtain a loan for $55,000 in addition to the existing first mortgage.
Over the past several years, the number and type of home equity loans available to consumers has mushroomed as banks and finance companies have accumulated large amounts of cash that they need to lend back out to borrowers. The highly competitive nature of home equity lending has caused lenders to offer an increased number of programs to consumers. In addition to the usual rate competition, lenders continued to increase the maximum amount they would loan on a property. Programs have leaped from 80% to 90% to 100%, and have topped out at 125%. However, most people do not borrower more than 100% of the value of their home because rates are much better and because interest on any amount over 100% loan-to-value is not tax deductible.
Credit standards have been relaxed to a certain extent as well. Two years ago, a borrower had to have excellent credit for a home equity line or second mortgage term loan. Now borrowers who do not meet normal credit requirements will not get rejected, but will be offered a loan at a higher rate under B-C-D credit programs. With all of the available programs and choices, consumers have much to consider when choosing a home equity program.
Home Equity Lines of Credit
The typical home equity line is a form of revolving credit in which a borrower's home serves as collateral. A borrower is approved for a specific amount of credit-the credit limit-which will become the maximum amount that can be borrowed under the plan. Lenders usually require the line to be at least $10,000, but total credit lines can range up to $1,000,000. Once the home equity line is in place, a borrower can borrow up to the credit limit at any time. Many plans require a minimum draw against the line of between $250 and $500.
The borrower is usually required to repay at least the miniumum interest due each month for the first ten years. The interest rate on home equity lines is variable, usually based on the prime rate (which was 8.25% in July 2006), and is capped at a maximum that ranges from 15% to 20%. At the end of that period, most plans will take the existing remaining balance and turn it into a 10 or 15 year fully amortizing loan. Of course, if these programs continue to prevail in ten years, a consumer could always take out a home equity line from another lender and gain an additional ten years of interest-only loan payments.
Interest rates for home equity lines are based on a number of factors. The most important factor is the total loan-to-value that the equity line will create. The best pricing can be found for home equity lines using 80% or less of the value of a home, with pricing increases occurring when the total loan exceeds 80%, 90%, 100% and 125% of the value of the home. Many borrowers at 80% or less can obtain rates at below the prime rate with good credit, while those borrowers using the 125% loan program will pay 13% to 15%.
The loan size also determines the interest rate for many lenders. At one institution, a $10,000 home equity line carries a rate of prime plus 1% while a $100,000 line is at the prime rate. Some programs also carry introductory teaser rates for the first three or six months, often at prime less 1% or less. Each institution sets its own break points for rate differences, so be sure to investigate what is available in your area.
Another rate factor is based on whether or not the borrower will be taking out funds when the equity line is established, and whether or not the borrower is transferring or consolidating other debt balances. One New York lender, for example, offers a home equity rate at prime for the life of the loan if a borrower is is transferring at least $40,000 from another home equity line. Usually, the lender charges prime plus .75% for the same loan. Many lenders are now also offering free home equity lines at better rates if the borrower is refinancing or purchasing and "piggybacks" the home equity line on top of the first mortgage.
The last factor affecting rates is based on whether the borrower or the lender will pay closing costs. In today's market, there are some lenders that are offering to pay all closing costs on all of their loan programs. Some lenders give borrowers the option of a lower rate if they pay closing costs, which include appraisal, attorney, recording and other fees that usually range around $800. Other lenders tie closing costs to the loan amount that the borrower takes out at the closing of the loan. If the lender knows the borrower will take out $25,000, for example, then the bank will not mind paying the closing costs because they will make back the costs with interest payments within a few months.
Based on all of these rate factors, it becomes clear that the best pricing is reserved for the higher end borrower who takes out funds at closing. A home owner who obtains a $100,000 home equity line and takes out at least $25,000 at closing should be able to get an interest rate at prime for the life of the loan and not have to pay any closing costs. The borrower who applies for a $7,500 line, however, may have to pay closing costs and wind up with a rate over 9%.
Second Mortgage Term Loan Options
Should borrowers need only a specific amount for a designated purpose and would prefer a fixed rate loan, second mortgage terms loans exist. For A credit borrowers, rates on these programs are usually less than prime rate and are fixed. The down side of these loans is that they always require closing costs be paid by the borrower and the closing costs range closer to $1,000. Over time, however, a lower fixed rate second mortgage term loan could be less costly than a home equity line with no closing costs but higher rates.
A Caution for Borrowers
Simply because lenders are lending furiously to anyone who will borrow, consumers should be extremely wary of not getting in over their heads with home equity debt. Consolidating other debts under a home equity line is a great way to lower interest payments, gain tax deductibility, and improve cash flow. Likewise, investments in home improvements and education are highly advisable purposes for home equity borrowing. Home equity loans of any type should never be used for day-to-day expenses. On the positive side, it's a great time for borrowers to get the best home equity financing in years.
Equity is defined as the value in your home, and is calculated by subtracting all outstanding mortgages from the market value of the home. Because loan balances and housing prices are changing constantly, the equity that home owners fluctuates as well. Lenders are less concerned with the exact dollar amount of equity in a home than the percentage of equity. For example, a home owner with a $500,000 mortgage on a $525,000 home has $25,000 in dollar equity but less than 5% in percentage terms. On the other hand, the owner of a $60,000 condominium with a first mortgage of only $40,000 has $20,000 in equity which is 33% on a percentage basis. Lenders would prefer to lend additional funds to the condominium owner because of the higher percentage of equity.
In is important to understand equity percentages because the maximum percentage of combined loan to value on a property is what has changed dramatically over the past two years. In the past, nearly all second mortgage lenders would not let the combined total of a borrower's first and second mortgage exceed 80% to 90% of the value of the property. A home owner with a $100,000 home and a $70,000 first mortgage could only borrow $10,000 (80% of $100,000 = $80,000 - $70,000 = $10,000). Today, that same home owner could not only borrow $30,000, the entire amount of the equity in the property, but could also borrow up to 125% of the value of the home. Unbelievable as it may sound, the borrower in the above example could actually obtain a loan for $55,000 in addition to the existing first mortgage.
Over the past several years, the number and type of home equity loans available to consumers has mushroomed as banks and finance companies have accumulated large amounts of cash that they need to lend back out to borrowers. The highly competitive nature of home equity lending has caused lenders to offer an increased number of programs to consumers. In addition to the usual rate competition, lenders continued to increase the maximum amount they would loan on a property. Programs have leaped from 80% to 90% to 100%, and have topped out at 125%. However, most people do not borrower more than 100% of the value of their home because rates are much better and because interest on any amount over 100% loan-to-value is not tax deductible.
Credit standards have been relaxed to a certain extent as well. Two years ago, a borrower had to have excellent credit for a home equity line or second mortgage term loan. Now borrowers who do not meet normal credit requirements will not get rejected, but will be offered a loan at a higher rate under B-C-D credit programs. With all of the available programs and choices, consumers have much to consider when choosing a home equity program.
Home Equity Lines of Credit
The typical home equity line is a form of revolving credit in which a borrower's home serves as collateral. A borrower is approved for a specific amount of credit-the credit limit-which will become the maximum amount that can be borrowed under the plan. Lenders usually require the line to be at least $10,000, but total credit lines can range up to $1,000,000. Once the home equity line is in place, a borrower can borrow up to the credit limit at any time. Many plans require a minimum draw against the line of between $250 and $500.
The borrower is usually required to repay at least the miniumum interest due each month for the first ten years. The interest rate on home equity lines is variable, usually based on the prime rate (which was 8.25% in July 2006), and is capped at a maximum that ranges from 15% to 20%. At the end of that period, most plans will take the existing remaining balance and turn it into a 10 or 15 year fully amortizing loan. Of course, if these programs continue to prevail in ten years, a consumer could always take out a home equity line from another lender and gain an additional ten years of interest-only loan payments.
Interest rates for home equity lines are based on a number of factors. The most important factor is the total loan-to-value that the equity line will create. The best pricing can be found for home equity lines using 80% or less of the value of a home, with pricing increases occurring when the total loan exceeds 80%, 90%, 100% and 125% of the value of the home. Many borrowers at 80% or less can obtain rates at below the prime rate with good credit, while those borrowers using the 125% loan program will pay 13% to 15%.
The loan size also determines the interest rate for many lenders. At one institution, a $10,000 home equity line carries a rate of prime plus 1% while a $100,000 line is at the prime rate. Some programs also carry introductory teaser rates for the first three or six months, often at prime less 1% or less. Each institution sets its own break points for rate differences, so be sure to investigate what is available in your area.
Another rate factor is based on whether or not the borrower will be taking out funds when the equity line is established, and whether or not the borrower is transferring or consolidating other debt balances. One New York lender, for example, offers a home equity rate at prime for the life of the loan if a borrower is is transferring at least $40,000 from another home equity line. Usually, the lender charges prime plus .75% for the same loan. Many lenders are now also offering free home equity lines at better rates if the borrower is refinancing or purchasing and "piggybacks" the home equity line on top of the first mortgage.
The last factor affecting rates is based on whether the borrower or the lender will pay closing costs. In today's market, there are some lenders that are offering to pay all closing costs on all of their loan programs. Some lenders give borrowers the option of a lower rate if they pay closing costs, which include appraisal, attorney, recording and other fees that usually range around $800. Other lenders tie closing costs to the loan amount that the borrower takes out at the closing of the loan. If the lender knows the borrower will take out $25,000, for example, then the bank will not mind paying the closing costs because they will make back the costs with interest payments within a few months.
Based on all of these rate factors, it becomes clear that the best pricing is reserved for the higher end borrower who takes out funds at closing. A home owner who obtains a $100,000 home equity line and takes out at least $25,000 at closing should be able to get an interest rate at prime for the life of the loan and not have to pay any closing costs. The borrower who applies for a $7,500 line, however, may have to pay closing costs and wind up with a rate over 9%.
Second Mortgage Term Loan Options
Should borrowers need only a specific amount for a designated purpose and would prefer a fixed rate loan, second mortgage terms loans exist. For A credit borrowers, rates on these programs are usually less than prime rate and are fixed. The down side of these loans is that they always require closing costs be paid by the borrower and the closing costs range closer to $1,000. Over time, however, a lower fixed rate second mortgage term loan could be less costly than a home equity line with no closing costs but higher rates.
A Caution for Borrowers
Simply because lenders are lending furiously to anyone who will borrow, consumers should be extremely wary of not getting in over their heads with home equity debt. Consolidating other debts under a home equity line is a great way to lower interest payments, gain tax deductibility, and improve cash flow. Likewise, investments in home improvements and education are highly advisable purposes for home equity borrowing. Home equity loans of any type should never be used for day-to-day expenses. On the positive side, it's a great time for borrowers to get the best home equity financing in years.
Cost Of Setting Up A Home Equity Line Of Credit
Cost of setting up a home equity line of credit
Setting up a home equity line of credit is like that of buying a new house (and signing a new mortgage application). Some of the costs include:
Property appraisal fee (to appraise the current value of your home)
Credit application fee (which is NOT refundable if you get turned down for credit)
Attorney fees for drafting & filing the line of credit agreement, title search fees, insurance and any taxes payable.
Transaction fee charged on everytime you make a withdrawal from your line of credit
Some home equity lines of credit are also subject to annual maintenance & administration fees. Check your agreement and with your lender to find out more about this.
Repayment of Home Equity Loans
How you repay back your home equity line of credit depends on the type of lender you borrow from. Some lenders do not accept monthly payments (towards the principal amount), and will want 100% of their money back upon maturity of the loan. For example, if you take out a $100,000 home equity line of credit on January 1st, 2005 and it matures on Dec 31st, 2010, this means you will have to repay back the entire $100,000 on Dec 31st, 2010. Ofcoure, you will have to make interest payments on these loans, based on the Annual Percentage Rate (APR) and the Prime Rate.
Many smart consumers like to pay off their home equity lines of credit as fast as possible. For example, if you took out $50,000 to purchase an expensive car, you might want to set aside $1000 every month so as to be able to fully repay back your loan upon maturity. You don't want the maturity date to expire and you NOT having the $50,000 cash available to fully pay off your loan, that would be a total disaster! If you choose to pay your entire $50,000 original principal balance upon maturity, this is known as a "balloon payment." If you cannot make this balloon payment on your loan, the lender will simply confiscate your home from you.
What happens if you sell your home, while still owing money on the home equity line of credit? If you do so, you will have to fully repay back the loan immediately. Therefore, do NOT take out a home equity line of credit if you are planning to sell your home in the near future.
Disclosure of Home Equity Loan Terms
Under the Federal Truth in Lending Act, all home equity line of credit lenders are required to disclose to you the important terms of the loan. Some of these terms include:
Annual Percentage Rate
Closing costs including attorney fees for drafting & filing the line of credit agreement, title search fees, insurance and any taxes payable.
Terms of payment (whether it will be a one time balloon payment or variable monthly payments)
Idea about the Interest Rate charged, which Index it is based on and the Margin.
Cancelling a Home Equity Line of Credit Loan
If you put your principal residence as collateral against a home equity line of credit loan, the Federal Truth in Lending Act gives you 3 days from the date your account is opened to revoke your decision and cancel the home equity line of credit loan. You must inform the credit lender by writing an official letter. Within these 3 days, you will also be refunded any closing costs for which you might have paid, including appraisal costs and any application (attorney) fees.
Setting up a home equity line of credit is like that of buying a new house (and signing a new mortgage application). Some of the costs include:
Property appraisal fee (to appraise the current value of your home)
Credit application fee (which is NOT refundable if you get turned down for credit)
Attorney fees for drafting & filing the line of credit agreement, title search fees, insurance and any taxes payable.
Transaction fee charged on everytime you make a withdrawal from your line of credit
Some home equity lines of credit are also subject to annual maintenance & administration fees. Check your agreement and with your lender to find out more about this.
Repayment of Home Equity Loans
How you repay back your home equity line of credit depends on the type of lender you borrow from. Some lenders do not accept monthly payments (towards the principal amount), and will want 100% of their money back upon maturity of the loan. For example, if you take out a $100,000 home equity line of credit on January 1st, 2005 and it matures on Dec 31st, 2010, this means you will have to repay back the entire $100,000 on Dec 31st, 2010. Ofcoure, you will have to make interest payments on these loans, based on the Annual Percentage Rate (APR) and the Prime Rate.
Many smart consumers like to pay off their home equity lines of credit as fast as possible. For example, if you took out $50,000 to purchase an expensive car, you might want to set aside $1000 every month so as to be able to fully repay back your loan upon maturity. You don't want the maturity date to expire and you NOT having the $50,000 cash available to fully pay off your loan, that would be a total disaster! If you choose to pay your entire $50,000 original principal balance upon maturity, this is known as a "balloon payment." If you cannot make this balloon payment on your loan, the lender will simply confiscate your home from you.
What happens if you sell your home, while still owing money on the home equity line of credit? If you do so, you will have to fully repay back the loan immediately. Therefore, do NOT take out a home equity line of credit if you are planning to sell your home in the near future.
Disclosure of Home Equity Loan Terms
Under the Federal Truth in Lending Act, all home equity line of credit lenders are required to disclose to you the important terms of the loan. Some of these terms include:
Annual Percentage Rate
Closing costs including attorney fees for drafting & filing the line of credit agreement, title search fees, insurance and any taxes payable.
Terms of payment (whether it will be a one time balloon payment or variable monthly payments)
Idea about the Interest Rate charged, which Index it is based on and the Margin.
Cancelling a Home Equity Line of Credit Loan
If you put your principal residence as collateral against a home equity line of credit loan, the Federal Truth in Lending Act gives you 3 days from the date your account is opened to revoke your decision and cancel the home equity line of credit loan. You must inform the credit lender by writing an official letter. Within these 3 days, you will also be refunded any closing costs for which you might have paid, including appraisal costs and any application (attorney) fees.
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