80% Home Equity Lines And Loans

80% Home Equity Lines And Loans 2018-02-14T10:34:34+00:00

Home Equity Loan
Home equity loans provide the borrower access to the equity currently into the home in the form of cash, which is paid out as a lump sum. The lump sum is then paid off over a set period of time, with a fixed interest rate. Even if you have repaid some or all of the loan, you cannot borrow again from the loan.

A home equity loan does not replace the existing mortgage like a cash-out refinance does; it serves as another loan in addition to the existing mortgage.

This money can be used to pay off existing debts, pay for school, for renovations or repairs, or other expenses.

Pros

  • The loan is secured by your home, so interest rates are lower than unsecured debt consolidation options.
  • Interest payments may be tax-deductible.
  • Monthly payments are predictable, easy to budget for, and help you stay on schedule for paying off your debt.
  • You can get a longer term for a home equity loan than you could for a personal loan.

Cons

  • If you default on this loan, you risk foreclosure on your home.
  • Using the equity in your home can negatively affect your long-term financial plans, especially if retirement is approaching.
  • With the loan spread out over a longer term, you may actually pay more interest in the long run, even if the rate is lower.

Home equity line of credit (HELOC)
HELOCs differ from home equity loans in that, instead of receiving a lump sum of cash, borrowers are allowed to borrow up to a certain amount from the equity built up in the home for a period of time set by the lender.

Let’s say you have a $10,000 line of credit on the equity in your home. You borrow $5,000, but then pay back $3,000 toward the principal. You now have $8,000 in available credit (and $2,000 to still pay back on the line of credit). This can provide more flexibility than a fixed-rate home equity loan.

Credit lines also have a variable interest rate that fluctuates over the life of the loan (this is in addition to the interest you are paying for the rest of your mortgage). Payments will vary depending on the interest rate and how much of credit you have used. HELOCs are only available for a pre-specified amount of time so when the time limit for the line of credit has expired, the full amount you borrowed must be paid off. A lender may or may not allow a renewal.

Also, funds from a HELOC are accessed through specially issued checks or a credit card. If considering a HELOC, keep in mind that lenders often require that an initial amount is withdrawn when you first set up the loan, that you withdraw a minimum amount each time you use it, and keep a minimum amount outstanding.

This money can be used to pay off existing debts, pay for school, for renovations or repairs, or other expenses.

Pros

  • Like Cash Out Refinancing and home equity loan, HELOC is also a secured loan, with your home as collateral. This means that interest rates are lower and interest payments may be tax-deductible.
  • You only pay back (and pay interest on) the portion of the line of credit you actually use.
  • Because it works similar to a credit card, the available equity that you can borrow can be used in the event of a later emergency or major home repairs.

Cons

  • Having access to a line of credit can tempt some individuals to overspend, especially if they are already having issues with handling their debt.
  • Variable interest rates (between your regular loan and the line of credit) can make payments unpredictable.
  • Defaulting will result in foreclosure.
  • The remaining balance due at the end of a HELOC repayment period is due immediately, which can result in a balloon payment.
  • You will have to pay closing costs with this option (although they are typically lower than the closing costs of a cash out refinance)

Which is Better?

Both provide numerous benefit for different needs. If you know you only need a single large sum to handle a specific expense (like home repair) and do not plan on borrowing against your equity again, then a home equity loan may be better suited for your needs. However, if you know that you will need continued funds over a period of time (like for tuition expenses), then a line of credit is the better choice. It gives you the flexibility to borrow only the amount you need, when you need it.

Also, if you borrow relatively small amounts and pay back the principal quickly, you can actually save by using  a line of credit rather than a home equity loan.

To help you determine which loan best suits your needs, ask yourself:

  • When do I need the money and for how long will I need it? Will it be for a short-term expense, or a long-term?
  • How long will I need to pay it off?
  • How big of a monthly payment can I handle in addition to my mortgage and other bills?
  • Would a line of credit tempt me to use the money carelessly because I will have continuous access to it?

Then, ask your lender:

  • How long is the term of the home equity loan?
  • What is the lifespan of the line of credit? Can it be renewed?
  • How large a line of credit do I qualify for?
  • What interest rate do I qualify for?
  • Do I have to use my credit line right away? (Some require an initial withdraw when first set up).
  • Under what circumstances can you freeze, reduce, or demand full payment of my loan?
  • Can I lease my house during the time of the loan?
  • Will you loan to me if my house is on the market (and at what rate)?
  • If interest rates go down, how low will my loan be affected?

Home Equity Loans and Home Equity Lines of Credit FAQ

  • Is the interest rate tax deductible? Interest paid on home equity lines and loans may be tax deductible.
  • Is the interest rate fixed or variable? Home equity loans have a fixed rate, while home equity line of credits can have a fixed or a variable rate.
  • What is a variable rate? A variable rate is one that changes when the prime rate changes. The prime rate is published in the money rates section of the Wall Street Journal.
  • Are there closing cost for setting up a home equity loan or home equity line of credit? No. There are no closing costs on home equity lines or loans, however, there could be an origination fee if elected by the borrower.
  • How long does it take to get a home equity or line of credit? Processing time can vary from client to client. However, once you sign the documents at closing, the funds are typically available after three business days.