Home Equity Loans

What is HELOC?

The Home Equity Line of Credit rates is a loan in which the borrowing and the lending party agree to a maximum amount of a loan within a given period of time. It requires a property to be pledged as security for the loan. It is different from a reverse mortgage or conventional loans, in that the borrower does not get the entire amount up front. It is a line of credit in which the total borrowed amount does not exceed the maximum agreed sum. In practice, it resembles a credit card. The borrower is given a specific credit limit that they can borrow up to. The draw period can typically last from five to thirty five years and the borrower can withdraw funds whenever the need arises; then the amount used is paid back with interest. At the end of the draw period, the borrower can pay the full principal amount borrowed, pay a balloon payment (that is one large payment at the end of the loan term), or pay depending on the loan amortization schedule.

A home equity line of credit is sought after because it has significantly lower interest rates associated with it. This is because the home is used as collateral and it is considered a safe loan by most lenders. If payments are not made, they can have the home foreclosed. Also, people can qualify for it even if their credit rating is bad, provided they own a home. Usually this type of a loan is sought when a large amount of money is needed for major expenses in one’s life.

HELOC vs. Conventional Loan

This type of loan has a variable interest rate, meaning the interest rate will change over time. What makes the loan very attractive is the fact that the interest paid is normally deductible under the majority of the federal and state income tax laws. The bottom line is that the cost of borrowing money does not end up being that high.

While this makes it sound as if everyone should be running out and getting home equity line of credit rates, the problem is that most of the public cannot afford it. The majority of the people seeking this loan are though to be ‘Upside Down’. Meaning they owe more than the value of their home.
Suppose the value of the house owned is $90,000 on the open market and $80,000 is owed on it. Most of the time one can borrow more than the value of the house, perhaps up to $110,000. If the money is used for living a life of luxury, when the time to repay the loan comes, the $110,000 and an additional realtor fee at the rate of seven percent ($7,700 in this case) will have to be paid back. If the house is put on the market for $117,700, it will never sell because it is not worth that much, and the owner will be looking at foreclosure!

Sensible Use of Home Equity Line of Credit

HELOC is not necessarily all bad, provided one uses it effectively. There are some things that one needs to look at when seeking HELOC. Firstly, there should be no application fee associated with the loan and even if there is one, it should be refundable at closing. Next, there should be no loan appraisal costs attached. There are numerous no-costs loans available, just look for them. There should not be any checkwriting or account maintenances fees. If the loan is not used, there should not be any "no usage” fees. Some people just like to have funds available in case of emergencies and there should not be any penalty associated if it is not used.

The variable APR should be almost the same as the prime rate and this should be the only cost involved. Variable-rate plans that are secured by residential homes, must by law have a cap on the amount the interest can be raised by over the life of the loan. Some plans even limit how much the payment can go up by.

Find a lender whose rates are adjusted quarterly, not monthly, and increments should be around 0.5% or less. Also sign up with a flexible lender willing to let the loan be converted from a variable interest rate to a fixed rate during the life of the loan. The lender should provide the option to convert a portion or the entire loan into a fixed-term plan. While it is always best to pay the principle and not only the interest, get the option of interest only payments and use only if necessary. Lastly, there should be the unrestricted option to repay principal without penalty. One should be allowed to pay off the Home Equity Line of Credit rates at any time without having to pay any fines.