Home Equity Loans and Home Equity Credit Lines: Uses and Resource Center

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Smart Choice: Energy Efficient Windows

from our BLOG

When it comes to putting together a home improvement project, choosing the right upgrades can save you time and money. Moreover, choosing the proper materials can add value to your home, something every homeowner should consider if they plan to eventually sell.

Home Equity Tip

for the weeks of: Feb 05

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Weekly Tip:
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Should You Tap Your Home’s Equity To Manage Personal Debt?

from our BLOG

Your personal debt level can be having an adverse impact on the way that you live. Credit cards, student loans, auto loans and department store debt can quickly add up — factor in interest rates of 10, 12, even 20 percent or more and the burden on consumers can be tremendous. If you are a homeowner, a readily available way to handle your debt load can ease the burden for you. Yes, tapping the equity in your home is one way for you to consolidate debt.

Residential Debt Consolidation

The longer you live in your residence, the more likely you have built up a decent amount of equity in your home. As you pay down your mortgage and enjoy the rising value of your home, the difference between your mortgage’s pay off amount and its current value is what lenders consider to be the equity in your home.

Let me give to you an example: You bought your home just over four years ago for $185,000, taking out a mortgage loan for $165,000. At that point your equity (or piece of the pie) is $20,000. Between making fifty payments to the mortgage company and kicking in an additional $50 whenever you had it, your outstanding balance has been reduced to $152,000. What’s more, your home’s value has increased nicely, thanks to a robust housing market.

An appraisal of your house reveals that it is now worth $219,000. The difference between $219,000 and the $152,000 outstanding balance on the mortgage loan is now $67,000. That latter amount represents your home equity, a portion of the amount you can use for debt consolidation.

Home Equity Lending

Lenders will look at your home’s value ($219,000) and allow you to borrow as much as 80% of that amount ($175,200) minus the amount you owe on your mortgage ($152,000). Therefore, you could borrow as much as $23,200 ($175,000 – $152,000) to cover debt, living expenses, and even take a vacation. Of course if your debt level is much smaller than that, you may simply want to borrow enough money to pay off your debt and then allow 5-10 years to pay off your low, fixed-rate home equity loan.

Home Equity Loans — Tax Advantages

Most homeowners are able to take advantage of tax deductions for their home mortgage. However, those deductions do not extend to cover most personal debt. On the other hand, a home equity loan is usually tax deductible even if the monies were used to pay off personal debt. In other words, you can let the government reward you for paying off high interest rate credit cards and other loans by giving you an extra deduction come tax time.

Worth Your Consideration

Of course, whether it is personal debt or a home equity loan, you will have to pay off what you owe. A financial calculator can help you compare your outstanding debt with a home equity loan to help you develop a plan that is affordable, tax deductible, and much lest burdensome then the high interest rate personal debt you are presently battling.

Explaining HELOCs

from our BLOG

A home equity line of credit (HELOC) is a type of loan in which the borrower can draw on a line of credit rather than receiving a lump sum as with standard mortgage refinancing. Many homeowners use a home equity line for major items such as home remodeling or renovations, college educations or to pay off multiple debts rather than using it for small daily expenses.

HELOC Characteristics

The majorities of HELOCs are second mortgages or used to refinance a first mortgage. It can save the homeowner money in the short-term, but HELOCs also carry a risk. HELOCs work by the borrowing applying for an amount up to the value of his home. For example, on a standard mortgage, he may borrow $175,000 which he would receive as a fixed dollar amount in one lump sum upon approval. However, with a home equity line, the borrower would receive a line of credit for up to $175,000 on which he can draw as needed in any amount necessary. This is especially beneficial for homeowners that use it to do home repairs with multiple contractors to pay. The homeowner accesses his funds through specialized checks or with a credit card linked to his home equity line of credit.

HELOC Repayment Terms

Most HELOCs are given a statute of draw term, or a draw period, in which he has access to the line of credit. This is usually negotiable with the lender depending on how the funds are used. HELOCs have a draw period and then a repayment period after the draw term has expired. Typical draw periods last between five and ten years, during this time the homeowner pays on the interest only. The repayment period of a home equity line is generally between ten and twenty years depending on how much of the line of credit was used. The monthly repayment due is based on how much is owed divided by the amount of months in the repayment period. There are some HELOCs that demand the total balance owed to be paid at the end of the draw period, most homeowners with this type of home equity line refinance with a standard mortgage at this point in the amount of the full balance.

HELOC Benefits

A home equity line can be advantageous for intermittent payments such as paying college tuition, remodeling the home or paying off credit cards. Another benefit is with a HELOC, interest is only based on the funds that are drawn, not on the total amount approved. The upfront costs of a home equity line are relatively low. On a $175,000 HELOC, the settlement costs may be anywhere from $3,000-$7,000. However, if the borrower is paying a higher than normal interest rate, the settlement costs may be covered in part or in whole by the lender. There are some HELOCs that can also be converted into a fixed rate mortgage at the end of the draw period, saving the homeowner from needing to deal with mortgage refinancing again.

HELOC Risks

HELOCs are not without their risks, however. The biggest downside with a HELOC is the vulnerability to interest rate risk. Every HELOC is an adjustable rate mortgage (ARM), but the ARM of a HELOC is much riskier than the ARM on a standard mortgage. HELOCs are impacted by the change in market instantly rather than having a fixed rate period with a standard ARM mortgage.

A homeowner should look at all available options to see which one is best for his or her situation before pursuing a HELOC, while there are many benefits – remember that there are also risks that should be taken into careful consideration.