Home Equity Line of Credit

Home Equity Line of Credit (HELOC)

There are various types of loan offered in the market. Of those, Home Equity Line of Credit (HELOC) is considered as the easiest way of getting loans. It is important to understand the definitions of appraised home value, equity, collateral, foreclosure, home equity loans to get a better insight on home equity line of credit.

Appraised Home Value - Appraised Home Value is the value of the home in the current market.

Equity is defined as the difference between the Appraised Home Value and the amount of mortgage owed by an individual. For example, if an individual owns a home worth $300,000 and if the mortgage is $ 225, 000 the equity is $ 75,000.

Value of property	$300, 000
Mortgage	$225, 000
Equity (Appraised Home Value - Mortgage)	$75, 000

Collateral - A property that is pledged as a guarantee to repay the money borrowed from the lender is called as collateral. If the amount borrowed is not paid as per the agreement the property will be taken by the lender.

Foreclosure is a legal proceeding in which the bank or the lender sells or acquires the property due to borrower’s inability to pay off the loan as per the agreement.

A home Equity loan is a loan that is acquired using the equity. This is also called as second mortgage as the loan is taken with the home as collateral.

Home Equity Line of Credit (HELOC)
The home equity loans are of two types

• Home Equity Loans with fixed rate or fixed rate loans
• Home Equity Line of Credit (HELOC)

Home Equity Loans or fixed rates loans are those in which the borrower is paid the money in advance and is expected to pay over a period of a time with a constant rate of interest. The monthly payment and rate of interest do not vary in these types of loans.

Home Equity Line of Credit (HELOC) is similar to a credit card that is the borrower will be provided with certain credit limit (the maximum amount of money that can be borrowed) from which money can be drawn at anytime. The monthly payments are paid based on the amount withdrawn and the current rate of interest. The monthly payments and rate of interest vary in these types of loans.

These type of loans are usually taken for

• Making improvements for home
• Purchasing another home
• For paying tuition fees in colleges
• For medical expenses
• To pay for credit cards that charges high rate of interest
• Purchasing cars
• Investing in real estates
  
  

Advantages of HELOC
Advantages from the borrower’s point of view

• These loans have lower rate of interest
• The interest paid for HELOC are tax deductible
• Also, these type of loans are easily approved as they are obtained based on the credit history
• The borrower may withdraw money whenever required, provided the withdrawal is within the credit limit. This is the major advantage of HELOC over Home Equity Loan with fixed rates.

Advantages from the lenders point of view

• Secured asset is placed as collateral

Disadvantages of HELOC

• As the property is placed as collateral enough care should be taken. If failed to repay within the agreement time the lender acquires the property.
• The monthly payments will increase if the rate of interest increases.

Comparison of Fixed Rate Loans and HELOC

	HELOC	Fixed rate loans
Amount	The borrower is sanctioned a certain amount that can be drawn at anytime	The borrower is given the money in advance
Rate of Interest	Variable rate of interest	Fixed rate of interest
Payments	Varies for each month	Same amount is paid each month

Requirements for Home Equity Line of Credit

While applying for Home Equity Line of Credit the lenders look for the following requirement in their clients.

• Credit history
• Income

Credit history
The credit history is the important requirement for sanctioning the loan. The credit history provides the lender with

• Personal information such as name, address etc.,
• Mortgage details, credit score (the credit score gives information about the financial status of an individual at a specific time), credit limit and also if the bills have been paid duly
• It also provides them with public information like bankruptcies, legal proceedings, and foreclosures.

Income
The lenders also look for the borrower’s income as that determines whether the amount withdrawn as loan can be paid or not.

Based on the credit history and the income the lenders determine the credit line. The credit line is the difference between the (appraised home value * percentage set by lender) and the mortgage value. For example, assuming the value of the property is $300, 000, the percentage value set by the lender is 75% and the mortgage is $ 190, 000 then the credit line is $35,000 (refer the table for better understanding).

Appraised Home Value	$300, 000
Percentage set by lender	75%
Percentage value of property	$225, 000
Mortgage	$190, 000
Credit Line (percentage value of property – mortgage)	$ 35,000

Charges involved while applying for Home Equity Line of Credit (HELOC)

There may be certain costs involved while applying for HELOC. They are much similar those costs that incur while buying a home. For instance,

• Application fees - this will be charged at the time of application and is not refundable among certain lenders
• Property appraisal cost - property appraisal estimates the cost of the property
• Attorney and documentation charges
• Certain lenders charge fee for every transaction the borrower makes
• Certain plans will charge the borrower with yearly membership fees. Yearly membership fees are the amount that is charged each for having set up the account with the lender. The borrower has to pay this fee even if there was no withdrawal.

Necessary steps for taking Home Equity Line of Credit (HELOC)

• Before applying for the loan, consider whether monthly payments can be made properly as in HELOC the amount paid for each month is different
• Perform a comparative study of the offers made by lenders in the market. Take note of the following factors while performing the comparison
  • Check whether the application fee is refundable
  • Compare Annual Percentage Rate (APR) - This is the percentage value of the cost of credit
  • Compare Interest rates
  • Check for change in interest rates
  • Check for Length or duration of the loan
  • Check if there is Pre-penalty payment. Pre-penalty are charged when the borrower wishes to close the loan before the agreement period
  • Check whether there is penalty for a missed or late payments
  • Check for balloon payments. These are amount that has to be paid after the end of the plan
  • Check for cancellation penalties

• Read the disclosures
• Finally, sign the document after understanding the rules and procedures completely.