What is a home equity line and why is it better than a regular loan?
America lives on debt, and obviously above its means… This reality is not going away and is simply a part of how we live, so let’s be smart about what we borrow and how to use it to our advantage. We used to look at our home as our nest egg or our own bailout money. Times have changed but reality remains that some have equity in their homes and still can get access to it at very attractive rates through a home equity loan.
What is a Home Equity Loan?
A home equity loan is simply a loan based on the equity in your home. If you owe your bank less than your home is worth then you have equity. You can borrow that equity as a loan or line of credit and offer it as collateral until the loan is paid off.
How do I know if I have equity?
This is very easy to figure out. Find the approximate value of your home (Zillow.com or look at your last tax assessment) then take 80% of that figure (most banks will not lend you more than 80%) and finally subtract any outstanding loan balances (1st mortgage, 2nd mortgage) you have on the house. Whatever you have left is the amount of usable equity you have in your home.
How do I qualify?
Home equity loans and lines can be attained from your local banks at attractive rates, you will need to submit an application, have a credit score above 700 (in most cases) and proof of income which consists of your last two pay stubs or two years worth of W2. Once your application has been reviewed the bank will have your home appraised, and will approve or decline the application.
Why should I get a Home Equity?
There are many benefits of a Home Equity over a conventional loan.
1. There is a 15 year re-payment period (smaller monthly payment)
2. Due to the term, it doesn’t tie up your Debt to Income ratio too bad
3. Rates are usually lower than most conventional loans
4. Money can be used as cash to purchase anything you like
5. It can be tied to your accounts as overdraft protection
6. You only pay on what you use (line of credit only)
7. Keep it as reserve money in case you ever need it
8. Interest is tax deductible
What is the difference between a Loan and a Line of Credit?
The
loan:
1. Has fixed payments and fixed higher rate
2. Has a simple interest payment structure (You get a check for the full amount)
3. Interest portion of your payment is tax deductible
The Line of credit (LOC)
1. Variable payments and Variable lower rate
2. Revolving credit line (You pay only on what you use)
3. Works just like a credit card with a credit line
Now you know the basic Home Equities and can understand what is right for you before entering the bank. Just remember that when selecting your loan, think about the purpose and the future. The purpose helps you determine what you need today and what is most convenient but the future helps you anticipate what you might need to protect yourself from having to re-apply.
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June 17th, 2009 at 5:40 pm
Hey, nice post, really well written. You should write more about this.
June 17th, 2009 at 10:50 pm
I disagree with these 2 points:
1. There is a 15 year re-payment period (smaller monthly payment)
4. Money can be used as cash to purchase anything you like
In reference to 1. their is a “draw” period of 10 years where the customer may access and pay back the line at anytime. Then comes a 20 year payback period still attached to prime(3.25)usually with todays rates it can fluctuate between 4.24-4.80.
Since the banks have changed their lending habits lines have been cut due to devaluation in home value. Because of these current issues in the housing market most banks now don’t lend past 65% LTV( LOAN TO VALUE) which can range from 100,000-150,000. Anything above 200,000 must have an LTV of 55%.
Onto point #4, during the questioning/verification of assets the underwriter will ask what the fund will be used for. I HIGHLY emphasize you to say HOME IMPROVEMENT not matter what the use of funds are because the loan/line will be denied.
June 18th, 2009 at 6:50 am
I disagree Constantin, I agree with your point around home improvements being a great reason for the money but it i snot true that banks will only lend to 65.5%, despite some having taken this step, many regional banks are still lending at 80%
The draw period is correct, 10 years is the typical draw period but a repayment period of 15 or 20 years is what i was referring to.
Great comment and discussion, keep it coming
July 18th, 2009 at 5:32 pm
Added to my RSS, Thanks!