Sometimes it may feel that your every spare minute is spent
working around the house. Yardwork, cleaning, home
improvement. It all adds up. In fact, it all adds up in a
different way as well - home equity.
Here, we'll focus on two of the three ways (the other being
cash-out refinancing) to tap into the equity you've built
up: home equity loans and home equity lines of credit. Just
read on to learn more.
What are the differences between a traditional home equity
loan and a home equity line of credit (HELOC)? What are the
advantages/disadvantages of each?
If you're a homeowner, you can borrow against the value of
your house through either a home equity loan (often called
a loan) or a home equity line of credit (often called a
HELOC or a line). A traditional home equity loan is a
closed-end second mortgage with a fixed term, fixed
interest rate and fixed monthly payment (although
adjustable rate home equity loans are also available). With
a home equity loan, all the money is disbursed in a lump
sum up front at the time of closing. A HELOC is a credit
line with as little as zero drawn up front, usually with an
adjustable rate and payment. Essentially, a HELOC is like a
credit card in that you can use what you need and can repay
all or the minimum payment each month.
Depending on the borrower, which is the right loan to
pursue?
Generally, a HELOC is a good choice to meet ongoing cash
needs, such as college tuition payments or medical bills.
Those who are self employed, paid by commission or rely on
a year-end bonus will also enjoy the flexibility of the
credit line provided by a HELOC. Basically, a HELOC is like
a checking account or a credit card, and can be paid down
and drawn out again repeatedly. Conversely, a home equity
loan is more suitable when you need money for a specific,
one-time purpose, such as buying a car or a major
renovation. It is also more appropriate for someone on a
fixed income that needs the consistency of a monthly
payment.
Which is easier to qualify for/obtain? Have lending
restrictions on either type of loan become stricter? Why?
The ability to qualify for both home equity loans and home
equity lines of credit are essentially the same. In today's
market, guidelines are fairly tight with most lenders
requiring a credit score higher than 680, and a combined
loan-to-value ratio of the first and second mortgages in
the 80-90% range. Homeowners with high credit scores -
above 720 - will qualify for the best rates. When exploring
your options, homeowners should also consider a cash-out
refinance which will generally offer a lower overall
interest rate on both loans and have easier qualification
guidelines.
Under what conditions should you avoid a HELOC? Under what
conditions should you avoid a traditional home equity loan?
If you're on a fixed income budget and require a stable,
consistent monthly payment, a home equity loan will be a
better choice. HELOCs are better suited for folks who need
flexibility in their monthly cash flow, or just want to
have an emergency line of credit for unexpected expenses.
In either case, a qualified loan consultant can help a
homeowner understand the tradeoffs of each loan type, and
the advantages and disadvantages of having two loans
compared to a single larger loan.
Is now a good time to even consider one of these loans,
considering the state of the lending market and real estate
market? Is it better to perhaps wait until the subprime
mess is further resolved or rates/terms improve for
borrowers?
There is really no reason to wait. The present low
long-term interest rates are very attractive rates in any
market. The impact of the sub-prime credit crunch has been
for lenders to tighten the guidelines and make these loans
harder to qualify for. Again, a qualified loan consultant
can quickly explain your options based on your individual
situation.
How have home equity loans and HELOCs changed over the
years? Have these products improved or become more
complicated?
Banks have made HELOCs easier to get in recent years and
have offered incentives such as no closing costs and
introductory teaser rates for the most creditworthy
homeowners. The ability to access your HELOC via credit
card also greatly increases the flexibility of this loan.
Where is the best place to apply for a home equity loan or
HELOC - a traditional bank/lender? A mortgage lender?
Banks, mortgage banks and other direct lenders will be the
best choice. Some lenders have attempted to offer
self-service HELOCs on their websites with limited consumer
acceptance.
The Important Points To Remember.
If you are thinking about a home equity loan or a HELOC,
you should apply as soon as possible. The national trend
toward declining home values means you will qualify for
less money today than you might have a year ago. Speak to a
qualified loan officer who can explain several different
options, and make sure you never agree to a pre-payment
penalty.
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In business nearly 20 years, Refinance.com is one of the
country's largest home mortgage lenders. Through its
diverse range of lending options - including FHA mortgages
- the company has assisted thousands of clients in reaching
their home refinancing goals. Founded in 1989,
Refinance.com is based in New York City with offices in
Syosset, NY, Boca Raton, FL, and Northville, MI. More
information is available at http://www.refinance.com .
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