Home Equity Loans

Home Equity Loans

Home Equity Loans are when a lender gives you a set amount of money and you pay
it back over a fixed payment schedule. Typically these loans have fixed interest
rates. This is a better option for someone who wants to lock in a fixed interest
rate, either because they think interest rates are going to increase or because
they like the certainty of knowing what their payment schedule will be.

A home equity loan also is a better option than a home equity line if you know exactly
how much money you need to borrow and when you want to borrow it.

How to get a Home Equity Loan or Line of Credit

You can shop anonymously for mortgage rates for a home equity loan or line of credit
on Zillow Mortgage Marketplace. Just submit a loan request
and you will receive custom quotes instantly from a marketplace filled with thousands
of lenders. The process is free, easy and best of all, you are anonymous.

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Home Equity Line of Credit

A HELOC, or Home Equity Line of Credit, is the right to borrow up to a certain amount
of money from a lender. The “line” is a credit line guaranteed by your house, meaning
that if you can’t live up to the terms of the line, then the lender has a right
(after a few nasty letters) to foreclose on your house. Typically, HELOCs (pronounced
HEE-locks) have floating interest rates that can change periodically.

For example, a borrower might obtain a $75,000 HELOC at “prime plus one.” This means
that the interest rate is one percentage point higher than the Prime Rate. If Prime
is 5.5%, then the HELOC is 6.5%. Remember: The rate is tied to the Prime and could
change as much as at every billing date. (The change can be dramatic; e.g., in April
of 2007, the Prime was 8.25 percent, whereas in June of 2003, it was 4.25 percent.)

Home equity lines can be used by the borrower to pay for anything. You literally
get a checkbook for the HELOC and you can write checks to your heart’s content until
you’ve maxed out the line’s limit. Although HELOCs were originally designed for
homeowners to pay for home improvements and other house-related projects, nowadays
borrowers use home equity lines for almost anything. Most HELOCs also have online
Internet access so you can pay bills online using your HELOC just like you would
with a regular online checking account. Like a credit card balance, you can pay
down a HELOC at any time, without penalties.

Home equity lines are serious stuff, since they’re secured by your house. If you
can’t meet the payment obligations such as your minimum monthly balance, your homeownership
is in jeopardy.

• Who should get one: Someone who might need extra cash for home improvements, or
  is looking at borrowing money to buy a different house (in addition to a mortgage).
• Who shouldn’t: Do not use a HELOC to splurge for things like vacations or to finance
  other consumer debts, like credit card purchases (unless you then plan to tear those
  cards up!). HELOCs are guaranteed by your house, which means the stakes are very
  high.

Home Equity Tax and Interest Information

Are HELOCs tax deductible? Sort of. Like first mortgage interest payments, home-equity
borrowing differs from credit card debt in that you can deduct the interest on your
tax return. But this only applies if you itemize your deductions. Also, the tax
deduction on interest is limited to loan amounts up to $100,000, with some restrictions.

What determines the interest rate? The
Loan to Value and your credit
score determine the interest rate of a home equity loan or line. If
your credit score is excellent (760+), you may be able to get an interest rate at
the prime lending rate, or possibly lower. A good credit score (700-760) will likely
get you an interest rate that is about the same as the prime rate. Poor credit will
likely result in rates of 1-5 points higher than the prime rate. Except in some
cases, you should be able to avoid fees such as application or appraisal fees, though
you might get hit with an annual fee or a small “recording” fee.

Home Equity Loan as a Second Mortgage

HELOCs and home equity loans can also be used as second mortgages at the time of
purchase. Frequently they are the second purchase mortgage for 10, 15, or 20 percent
of the purchase price when buying a home. Home buyers can avoid buying
mortgage insurance (PMI) if they take out two loans instead of one, with
no single loan exceeding 80 percent of the purchase price. Home equity loans (or
lines) can fill this gap, wherein the first mortgage is frequently 80 percent of
the purchase price and the Home Equity Loan is the second mortgage.

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