Home Equity Line of Credit (HELOC)

Home equity as a source of a line of creditHome Equity - RiteWay

If ever you are in need of borrowed funds, one practical and handy source of credit is a Home Equity Line of Credit (HELOC). To begin with, a home equity credit line will offer you a large amount of cash with a comparatively low rate of interest. It also gives you some tax benefits not available with other kinds of loans.

HELOC and security for the loan

Home equity lines of credit (HELOC) will require property to be pledged as security for the loans. Obviously, this kind of borrowing may jeopardize your home and you, if you default on a loan or even if you are late with your monthly payments.
A loan with a balloon payment , that is a large payment at the end of the loan term, may result in your borrowing more money to pay off the debt. It may also put your home at risk, if in the course of the original loan you are deemed ineligible for refinancing. In the event that you sell your home, the conditions of most loans will require you to pay off all debts on your credit line at that time. While home equity loans provide you with ready cash quite easily, you tend to borrow more freely as well.

Alternatives to home equity line of credit and home equity loans

It is important to bear in mind that there are many other ways to borrow money besides home equity credit lines. Second mortgage installment loans are one such viable option. Certainly second mortgage plans place an extra future burden on your home or property, in terms of an added mortgage. But the money lent is usually given as a lump sum, not as advances through continuous charges to a card or checking account. Also, a second mortgage generally has a fixed rate and fixed monthly payments.
Another option, preferred to borrowing money outright, is a credit line that does not use your property as security. Under the right conditions, that also might be available to you with a credit card, or an unsecured credit line allowing you to write checks whenever you need the funds. Information about loans for specific items, such as auto purchases or tuition fees, is available at your request.
Contact a mortgage broker today to get your competitive low rate.

Understand loan types

Solid statistics are hard to find, but lenders believe a third or less of home-equity borrowing is used for anything that could be considered an investment, such as home improvements or education. The rest goes for debt consolidation, vacations or purchases of assets that quickly depreciate, such as cars.

If you’re thinking of literally betting your house with a home-equity loan or line of credit, you should clearly understand how these loans work, when to use them and how to get the best deals.
First, the basics. There are two types of home equity lending, loans and lines of credit:

  • Home-equity loans are installment loans, like regular mortgages and auto loans. You’re given a certain amount of money which you typically receive all at once and pay back according to a set schedule, over time. Home-equity loans usually come with fixed rates and fixed payments.
  • Home-equity lines of credit, by contrast, work more like credit cards. You’re given a credit limit that you can borrow against, and paying down your debt frees up more credit that you can potentially spend. Home-equity lines of credit have variable interest rates that are typically tied to the prime rate.

Unlike credit cards, however, home-equity lines of credit usually aren’t open-ended. For the first 10 years or so, you can draw as much as you want from your credit limit, and you only need to pay the interest charges. In the next stage, however, the “draw” period ends and whatever debt you have left is “amortized,” which means you need to start paying principal and interest to retire your debt. (Some lenders let you renew your draw period, but eventually the debt has to be paid off.)

When to use these loans

A home-equity loan is generally the best choice when you know exactly how much your purchase is likely to cost and you need several years to pay it off. A major home-improvement project, for example, might be a good candidate for a home-equity loan.
A line of credit may be a better option for shorter-term borrowing, or when you want to be able to tap your home equity to cover emergencies.

5 tips for smart borrowing

Here’s how to know if you’re getting a good deal:
Compare the rates. The rate you’ll be offered on a loan or line of credit depends heavily on your credit score — perhaps too much. If you have an excellent score of 760 or above, you should be able to win a home-equity line of credit for half a point below the prime rate. A good score of 700 to 759 should win you a rate equal to prime. People with mediocre to poor credit can pay 1 to 5 points over prime, or more.

Avoid the fees. If you have decent credit, you shouldn’t have to pay any application or appraisal fees to borrow against your home. (Make sure the lender isn’t tacking fees onto the loan amount, and that you’re not paying a “broker fee” if a third party is helping to arrange the loan.) You may have to pay recording fees, which should be minimal, and an annual fee on your credit line.

Know the tax rules. Home-equity borrowing is often touted as superior to other consumer debt because you can deduct the interest. But that’s not always true. You have to be able to itemize, which most taxpayers can’t do because they don’t have enough deductions.

If you have excellent credit, for example, you might be able to get a new car loan for a fixed rate that’s actually lower than what you’d get on a variable line of credit. Unless you’re able to itemize, the fixed-rate auto loan is clearly the way to go.

Also, know that even if you do get a deduction, the tax break is limited to interest on loan amounts of $100,000 or less; if you’ve borrowed more, the interest you pay on amounts over $100,000 can’t be deducted.

Know what you’re risking. A home can be a good way to build long-term wealth — as long as you’re not constantly draining it away. Every dollar of equity you borrow is a dollar that can’t be used to buy your next home when you’re ready to trade up, or to fund your retirement when you’re ready to downsize.

Contact a RiteWay Mortgages Loan agent today TOLL FREE 1-877-531-7334.

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