Home Equity Line of Credit - Home Equity Line of Credit or most commonly referred to as "HELOC", refers to a loan in which the lender agrees to lend a maximum amount within an agreed time period.
A Home Equity Line of Credit in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you may borrow up to.
A draw period usually lasts anywhere from 5 to 10 years and allows you to borrow HELOC funds whenever you feel the need; you’re only required to pay back the amount you use plus any interest.There are two types of home equity loans: a fixed rate loan, or an adjustable rate line of credit.
The fixed rate home equity loan is attractive when you need the money immediately. This type of loan gives you protection against rising interest rates. They typically take the form of a fifteen year fixed rate, or a thirty year amortization with any outstanding balance due after fifteen years.
A home equity line of credit, on the other hand, is attractive if you do not need the money right away. You only pay interest on the amount outstanding. Therefore, if there is no balance, there are no payments. When there is a balance, the lender typically requires that you only pay the interest due. The lenders typically let you draw on the line for up to twenty years, and then require you to pay back principal after the draw period has expired.
Some HELOCS have minimum draws at close. This means that you will have to take a minimum cash out amount at close. Be sure to ask your mortgage broker if your HELOC has a minimum draw at close.
Most Heloc's, Home Equity Lines Of Credit, have an adjustable interest rate that is tied to a certain index. Some examples of indexes are: Libor, Prime, Cofi, MTA, etc... The rate will usually be index + the margin. The margin is usually based on the loan scenario, your credit scores, your LTV (loan to value), and equity line amount. The better your situation and the better the loan looks, usually the lower your margin will be. An example might be: if you were only borrowing a 30k home equity line, you have a home that is worth $300,000, you only owe 100k on your first loan, and your credit score is over 750 you may qualify for a loan that is prime + 0 for the margin. This means that your loan interest rate will always be equal to whatever Prime is. Now for the same situation, but with a 650 credit score and a 200,000 balance on your first loan, your credit is worse and your loan to value is significantly higher, so you will probably have a higher margin on your equity line: something like prime + 3.5% for your margin. Therefore you interest rate will always move up or down with Prime plus the 3.5%.
An advantage to opening a home equity line of credit even when not in need is to lock in the ability to tap into the equity built in the house. If the value of the home should decline, rather than losing financial power due to shrinking equity in the house, the homeowner would still have the full financial power to use the line of credit, which was opened when the home value was higher.
Many homeowners actually originate a home equity line of credit even when they have no immediate need for money. The beauty of this program is that you do not pay any interest on the equity line until you actually draw the funds. Having the HELOC can serve as a savings account of sorts or "rainy day" money if you will. It allows homeowners quick access to cash should ever a need arise.
Home Equity Line of Credit (HELOC) - Home Equity Line of Credit (HELOC) is a line of credit against which a homeowner can borrow as often as his financial situation calls for. He can borrow and pay off the debt any time he chooses. When there is an outstanding balance, the required payment is the interest accrued every month. When there is no balance, he incurs no finance charges.
A heloc can be used when interest rates are low to purchase vehicles and other large items which would normally be financed with fixed rate loans. Check with your tax consultant about writing off the interest that is paid on these items. HELOCS can have a check and credit card attached to them for ease of use when purchasing against the equity of your home.
Ways to use your Home's Equity to your advantage is to get the rate down as low as possible. One option is Auto debit. You can receive a discount rate if you automatically debit a set amount each month from your credit line. It can be used to pay bills or car payments. Option two, some lenders will give you a discount rate if you agree to use your credit limit as soon as you get it.
Most banks allow homeowners to borrow up to 100% of the house value. A handful of "non-prime" lenders even lend up to 125% of the value. As one can imagine, there are many restrictions on such high Loan-to-Value Home Equity Line of Credit. One of the most common restriction is an appraisal report on the property to ensure the house value is supported and that the local housing market is not in a down trend with declining values.
HELOC's are usually fully indexed at the Prime Lending Rate plus an additional number of interest points depending on what the borrowers credit score is, and how much money is borrowed against the property -vs- its' value.
Home Equity Loans, similar to all mortgages, are secured by the house. Should the homeowner defaults on payments, the bank can foreclose on the house that is used as collateral.
125% home equity loans - Before you decide to refinance with a 125% home equity loan there are some you should consider. The main concern with these programs is that you will owe more on the home then it is actually worth. This may cause a problem if you want to move in the near future
Be very careful when using the 125% loan. If you don't gain back the extra 25% through appreciation or making improvements, then you will be obligated for the extra amount if you sell your home. Can you handle the thought of owing more on your home than your home is worth? If not, then this loan probably isn't for you.
This may be an excellent way to finance any improvements that need to be made in the home. The improvements in turn may increase the value of the home after they are completed.
For some consumers, financial burdens may make this an attractive choice for debt consolidation. If you aren't planning on moving for awhile and your budget is stretched to the limit, this would be an alternative.
Talk to your loan professional today about the pros and cons of using this loan product in your situation.
Remember that if you are taking equity out of your home in amounts over $100,000 that is not related to the improvement of the home nor to purchase additional property, then you are not able to deduct the interest payments on your taxes.
Lenders offer 125% Home Equity Loans in markets where property values are on the rise. The loan is made with the expectation that the property will increase in value and give equity protection to the lender. Lenders become very hesitant to offer these kinds of loan programs in markets where property value are stable or declining.
Qualifying for a loan that is 125% of the value of your home is much harder and more strict than applying for a mortgage loan that is 100%, or under, of the value of your home. Normally, you will not be able to have any late payments over the last 12 months, and many times no late payments during the last 24 months. Your credit scores should definitely be over 700 and some lenders will require even higher credit scores for 125% financing.
These are great loans for paying off debt and to make your interest a tax write off.
Using Your Equity to Make Home Improvements - If you have equity in your home, you can use that equity to pay for improvements to your home.
Home Equity Loans come in two forms, a one time loan and a line of credit. A one time Home Equity Loan gives the borrower the funds in one lump sum, and the borrower repays the loan in equal payments over the loan term. A Home Equity Line of Credit works like a credit card account. The homeowner draws funds from the credit line when needed, and needs to pay only the interests on the outstanding balance.
A home equity does not have to be used for improving the home. A home equity can be used for a rainy day, starting a business, purchasing a car, consolidating debt or any other reason that you may want.
Depending on the costs of your planned improvements there are a couple types of loans you may want to consider. If you have sufficient equity in your home you can look at a home equity loan or line of credit to fund the work. If you are planning a major renovation, there are also rehab loans that will base your loan off of the "as completed" value of your home.
There are rehab loans available where the work is completed by a licensed contractor, as well as loans available where the owner completes the work themselves.
You should plan wisely to determine whether the improvements you are making to your house would add any value to your property. Some improvements are only cosmetic and do not add value. You should talk to your local appraiser or mortgage broker to find out what improvements add value to a home during an appraisal to aide in your home improvement planning.
The interest on a home improvement loan, whether it is used for making home improvements or paying off high interest credit cards may be tax deductible.
The need to remodel a kitchen or bathroom, adding a swimming pool, or building an addition on your house are some of the most popular reasons for using your equity to make home improvements.
Often times, people will obtain a home equity line of credit in order to draw on the funds for their home improvement when needed and therefore reducing the cost of the money overtime by not paying interest on money they do not yet need.
Using your equity for home improvements is a great reason for a refinance, because you are using your equity to increase its self. The home Improvements you do to your house will only increase the value of your home.
Using the equity in our home to finance home improvements is a great way to get low cost home improvement funds. The interest rate will usually be lower than other forms of financing plus the interest is usually tax deductible.
Home Equity Line of Credit - A HELOC (Home Equity Line of Credit) is a lien on your property in the form of revolving credit secured by the equity in your home.
HELOC's have a draw period and a repayment period. The draw period is the amount of years that you are allowed to use the credit that is in your account (or draw money out). Your minimum monthly payment is interest only. When you HELOC reaches its repayment period your minimum payment increases to include payment of the principal.
Home Equity Lines of Credit work very similarly to credit cards. You have a maximum credit limit and you can use any amount of the credit line up to that maximum limit. You only pay on what you borrow so if you have a equity line with a 20k limit and you only use 1k of the equity line you only have to make minimal payments on the 1k that has been used. If you have no balance on the equity line there is no payment to make.
Home equity lines of credit are used often for debt consolidation. Paying off high rate credit cards and consolidating them into one low monthly payment helps with monthly cash flow. Usually the rate on the home equity line of credit is lower than credit card rates also.
A Home Equity Line Of Credit is often treated just like a credit card on your credit report. If you "max out" this revolving line your credit scores may drop depending upon your overall credit profile.
Most HELOC loan programs lend up to 95% to 100% of the value of the home. A few banks even lend up to 103%, provided certain conditions are met. As with other loan programs, borrowers must have perfect credit histories and sufficient incomes in order to borrow 100% of the home value.
A Home Equity Line of Credit is typically an adjustable rate product. Additionally, the index used for most HELOCS is the prime rate. Because the prime rate has seen numerous increases in the last half of 2005 and in early 2006, HELOCS seem to be losing much of their popularity.
One of the advantages of a Home Equity Line of Credit is that you do not pay interest on the money until you actually need and use it.
Home Equity - Home equity is the difference between how much is owed on a mortgage and what the value of your home is. If you have a home that is worth $500,000 and your the amount you owe on your mortgage is $350,000, then you have $150,000 worth of equity in your home.
Remember that your equity is based on 2 things. 1. The amount your home sells for. 2. The amount your home appraises for.
Most people use the equity based off how much their home appraises for.
It is very common to access the equity in your home with a home equity (fixed) loan or a home equity line of credit, or HELOC. A HELOC allows you to draw money out of your equity balance up to your limit and make payments on the outstanding balance.
Many people think of pulling equity from their home as making a withdrawal from a savings account. This isn't an accurate analogy. Although the equity in your home is yours, if you take out an equity loan, it is a loan against the equity of your home. You will have to pay interest on the amount that you take out, until you sell your home and pay off the loan. For this reason, it's probably not a good idea to pull out equity to spend on unnecessary things like vacations, new cars, etc.
Just remember that the equity in one's home has a zero rate of return. Your home will appreciate whether or not you have a large amount of equity or a small amount. Though it is not a good idea to use equity for non-preferred debt, it is a good idea to use it to gain greater returns on your money.
Your home is the largest savings account that you probably have. If you need to take some cash-out to make improvements, a major purchase, or pay off all of your credit card debt, you should use the equity in your home wisely.
Your homes equity can be taken out in the form of a loan and used for a variety of purposes.
Be careful about using your equity as if its your own personal ATM. Home Equity is not the same as cash because its value can fluctuate. Any cash taken out of your home's equity should be spent adding value to the house (pool, deck, guest house, etc) or to pay off high interest consumer debt (credit cards, car loans, etc). If you spend the cash from the equity in your home frivously you may end up "underwater", or owing more than the home is worth.
You can access the equity in your home in a variety of ways. First off you can refinance your 1st mortgage and pay off some outstanding debts you may have or just simply take some of the equity our of your home as cash. Second you can take out a second mortgage to access the equity in your home. Again you can use this money for whatever you so choose. Lastly, you can take out a home equity line of credit to get money out of your home. For all of these options you can use the money for things such as a vacation, investing, putting away for a rainy day, buying furniture, paying for home improvements, putting your children through school and many other things. Your trustworthy mortgage professional can figure out which option is in your best interest and will help you achieve your financial goals the most effectively.
Building Equity - There are quite a few ways to build equity in your home faster than a traditional fixed rate mortgage will allow. Within the first six years of your home, for every dollar you apply towards your mortgage, approximately twenty cents will go towards reducing your principle, or the original loan amount borrowed.
One way to increase the amount applied towards your principle is to increase your monthly payment to a higher amount. If this is not possible than structuring your mortgage with a bi-weekly payment plan will help to decrease your principle balance and increase the equity in your home.
Building a home also has an advantage over buying an existing home. When you build you usually end up with instant equity at the end of the construction phase. If you have good credit and want to build you should consider a construction loan or a one-time-close loan.
If you get a tax refund check every year, rather than spending it or put it in your savings account, apply it towards paying down the principal of your mortgage. Interest rates offered by most savings accounts and CD's do not come close to the interest rate charged on your mortgage loan. Paying down the principal in the early years of your loan can significantly lower the total interest expense in your mortgage over the life of your loan.
Instead of making an extra mortgage payment, many of the savviest personal real estate investors use any additional capital to invest in additional assets, which over an equivalent time period tend to build more value than additional payments to principal. Instead of trying to pay off your house 7 years faster, in certain areas it may be more profitable to invest that money in additional property. Assuming a 30 year mortgage, ask yourself, "How much was my house worth 23 years ago?". In most areas of the country, the answer might be 1/5th or even less of its current value. Now ask yourself how much even a relatively small additional investment would be worth in the same amount of time. In many areas you will likely find that owning more property is more lucrative than paying down principal, because they can always print more money, but they aren't making any more land.
Not all lenders allow you to structure and pay weekly or bi-weekly directly with them. You can do this on your own if you are diligent. Take your monthly mortgage payment and divide it by 4. If you always dedicate or set aside this dollar figure every week then in the months that have 5 weeks instead of 4 you add those additional funds to your principal that month. At the end of the year you will have put an entire monthly payment directly towards reducing your principal balance.
If you can make one extra payment per year you will end up knocking 6-7 years off of your mortgage.
Although property values are not guaranteed to increase they have always risen and historically performed well. There may be times where values decrease slightly or stagnate but your investment in real estate will 99% of the time increase in value over time.
There is one very simple way to build equity without making any additional payments on your mortgage. That is simply to own property. In some areas of the country, southern California for instance, property values have risen over 20 per cent per year for the past couple of years. Although property is not guaranteed to increase in value, you can see that the more real property that you own the chances are very good that the more equity you will be building.
Building equity also comes from natural appreciation in your property. If you are in an up and coming area the value of your home, and equity will increase at a quicker pace.
Home Equity Line of Credit a.k.a HELOC - Interest rates have been at a historic low. If you have a home equity line of credit, you may consider taking out a home equity loan to repay it when interests rates rise. Since interest rates on home equity lines of credit are tied to the prime rate, if rates rise, so will the interest on your loan and your monthly payment. By replacing the home equity line of credit with a home equity loan, you lock in a lower interest rate.
It is currently an excellent time to refinance your Home Equity Line of Credit or other secured line of credit product or personal loans into your mortgage, locking in a low fixed rate and saving money each month.
It is important to know when the draw period ends on your line of credit. At the end of the draw period, your loan will convert to a fixed mortgage at the current rate. You may also lose the option of making interest-only payments. Refinancing will allow you to control when you lock in.
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