Home Equity Lines of Credit |
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Equity on a home you currently own, financing college education, home improvements, long-planned vacation, new car? With or without equity, you can enjoy some great payoffs from borrowing opportunities introduced less than a year ago. Home equity is the value in your home, calculated with subtractions of all outstanding mortgages from its market value. The constant change in loan balances and housing prices results in fluctuating equity of homeowners as well. For lenders the concern is the percentage of the equity rather than the exact dollar amount of home equity. For example, a homeowner with a $500,000 mortgage on a $525,000 home has $25,000 in equity but less than 5% equity. In contrast, the owner of a $60,000 condominium with a first mortgage of just $40,000 has $20,000 in equity, or 33%. The condominium owner is preferable for lenders for additional funds due to the higher equity percentage. Choose your Lines of Credit Understanding equity percentages is necessary as the maximum percentage of combined loan to the property value has witnessed dramatic changes in the last two years. With a $100,000 home and a $70,000 first mortgage, a homeowner was able to borrow only $10,000 (80% of $100,000 = $80,000 - $70,000 = $10,000) some years back. Now the same homeowner can borrow $30,000, the entire amount of the equity in the property apart from lending, up to 125% of the value of the home. It may sound unbelievable but you can get a loan of $55,000 apart from the existing first mortgage. In the last two years a spurt in cash accumulation in banks and finance companies has led to an increase in the number and types of home equity loans for consumers. Being highly competitive, home equity lending is offered in more consumer programs. Besides the usual rate competition, lenders continue hiking the maximum loan amount on a property. As a result programs have rapidly shot up from 80% to 100%, and in 1997 topped out at 125%. Credit standards have also been considerably relaxed. Candidates unable to meet credit requirements are not rejected but are offered higher-rate loans under B-C-D credit programs. With abundance of choices, consumers have a lot to consider for home equity programs. Factoids and Mortgages Decide Your Equity Ratings A borrower gets approval for a certain credit limit under the plan, with the line being at least $5,000, with total credit lines going up to $500,000. After securing the home equity line, borrowing up to the credit limit is possible at any time. Repayment is usually the minimum interest due every month for the first 10 years. The interest rate on home equity lines can be prime rate to a maximum of 15%-20%. When the period ends, the existing remaining balance is usually turned into about a 10-year fully amoritizing loan. In the event of the programs continuing in 10 years, a home equity line can be taken from another lender for an additional 10 years of interest-only loan payments. Home equity lines base interest rates on factors like the total loan-to-value created by the equity line. Home equity lines of 75% or less of the home value are best. The pricing increases when the total loan exceeds 80%, 90%, 100% and 125%. Loan size in many cases determines interest rate. A $7,500 home equity line may have a rate of 9.75%,while $100,000 could be 8.5%. Introductory teaser rates for the initial few months at under 6% is common. Each defines its breakpoints for rate differences, so be sure to analyze your options. Rates are affected by whether the borrower or lender pays closing costs. Currently some offer to pay all closing costs on all loan programs. Others let borrowers choose a lower rate for paying all closing costs, including appraisal, attorney, and recording, that approximate $600. Closing costs could also be tied to loan amount at the closing of the loan. When the lender is certain of the borrower taking out enough to cover closing costs with a few months of interest payments, the bank pays the costs. Consequently, the best pricing is for the high-end borrower taking out funds at closing. A Caution for Borrowers! The readiness of lenders to accept any borrower should make consumers careful of getting overwhelmed by home equity debt. Consolidating other debts under a home equity line lowers interest payments, gains tax deductibility and improves cash flow. Investments in home improvements and education are recommended for home equity borrowing. Never use a home equity loan for daily expenses. In short, the time is right for borrowers to get the best home equity financing in years. |
