Home Equity Loan Comparison
Home Equity Loan Comparison
Abbreviations and definition of terms used in the document
Home equity loans otherwise called second mortgages are classified into two types. They are:
- Home Equity loans with fixed rate of interest
- Home Equity Line of Credit (HELOC)
Home Equity Loans with fixed rate of interest: In these types of loans the borrower is lend the money in advance for which the borrower will pay monthly payment with fixed rate of interest over a period of time. Since the rate of interest for this type of loan is fixed, the monthly payment is the same for each month. These are otherwise called as fixed rate equity loans.
Home Equity Line of Credit (HELOC): In these types of loans the lender sets a credit limit (credit limit is the maximum amount that can be borrowed) from which the borrower can withdraw money whenever required. The rate of interest for this type of loan varies as it is calculated based on the current rate which implies that the monthly payment also varies.
Loan-to-value (LTV) ratio: The LTV ratio is defined as the money borrowed divided by the value of the property. The lender can give up to 80% LTV (loan-to-value) ratio in home equity loans.
Need for Home Equity Loans
These type of loans are usually taken for
- Renovation purposes
- Purchase of new property
- Paying for education
- Medicinal purposes
- For paying credit card bills
- Purchasing vehicles
- Starting a new business
Comparison of Fixed rate loans and HELOC
| Fixed rate Equity loans | HELOC | |
| Amount | The amount is paid in advance | A credit limit is set from which the borrower can withdraw whenever required |
| Payment | Monthly payments are fixed | Monthly payment varies |
| Rate of interest | Fixed rate of interest | Variable rate of interest |
| Purpose | When the amount is required at once, this type of loan is better. | When the amount is required periodically, this type of loan is better. |
| Term | When the amount is required for long-term purposes like renovation of house, this type of loan is preferred. | When the amount is required for short-term purpose like medical expense, educational purpose etc., this type of loan is preferred. |
Advantages of Home Equity Loans over Auto Loans
- Home Equity loans offers lower rate of interest
- Home Equity loans are tax- deductible
- Monthly payments will be lower
An example showing the savings of Home Equity over Auto Loan is given below:
Source: San Mateo Credit Union
Home Equity Vs Mortgage
| Home Equity | Traditional Mortgage |
| Home Equity can be used for any purpose like college tuition, medical expenses etc., | Traditional loans are used to buy property |
A tabular column showing the trends in Home Equity and Mortgage from the year 1995 to 2006 is given below:
|
Year |
Equity |
Mortgage |
||
|
Billions |
Percent |
Billions |
Percent |
|
|
1995 |
4651.30 |
58.20 |
3338.80 |
41.80 |
|
1996 |
4771.70 |
57.30 |
3548.90 |
42.70 |
|
1997 |
5007.50 |
57.00 |
3772.30 |
43.00 |
|
1998 |
5469.10 |
57.30 |
4076.50 |
42.70 |
|
1999 |
5944.90 |
57.20 |
4450.70 |
42.80 |
|
2000 |
6583.90 |
57.70 |
4817.30 |
42.30 |
|
2001 |
7209.70 |
57.70 |
5281.80 |
42.30 |
|
2002 |
7762.50 |
56.70 |
5917.30 |
43.30 |
|
2003 |
8426.50 |
55.90 |
6658.30 |
44.10 |
|
2004 |
9691.60 |
56.20 |
7551.70 |
43.80 |
|
2005 |
10519.60 |
54.30 |
8883.20 |
45.70 |
|
2006 |
10945.20 |
53.00 |
9675.70 |
47.00 |
Source: HousingBubblebust.com
The graph format of the above table:
Comparison of Cash-Out Refinancing and Home Equity
| Cash-Out Refinancing | Home Equity |
| Single payment | Choice between HELOC and fixed rate loans helps to obtain either credit limit payment or single payment |
| Refinance the current mortgage for higher amount using the home equity | Either a part or the whole of the available home equity can be borrowed |
| A replacement of the current mortgage | A separate loan on the current mortgage |
| Long loan terms | Shorter when compared to Cash-Out Refinancing |
| Interest are lower than home equity loans | Interest rates are higher when compared to Cash-Out Refinancing |
Equity rates offered by popular banks in the US
| Banks | Home Equity | HELOC |
| WACHOVIA CORP. (source: Wachovia corp) |
$8,000 minimum loan amount Up to $2.5 million for loan requests to access equity (Maximum loan amounts vary by state) Up to $250,000 for purchase requests |
$8,000 minimum loan amount Up to $2.5 million for loan requests to access equity (Maximum loan amounts vary by state) Up to $250,000 for purchase requests(Purchase money Prime Equity Line of Credit only available as a second lien closed with a purchase money first lien) |
| Bank of America Corporation (Source: bankofamerica.com) |
Up to 25 years (Based on Home Equity Assumption - Document available in the website) Tax Deductible Cash is paid out in a single check or an electronic transfer to the account of your choice. No Fees & Closing Costs |
10 year draw period followed by an additional 15 year repayment period (Based on Home Equity Assumption - Document available in the website) Tax Deductible Money Access * 24/7 access with Online Banking * Bank of America ATMs * Banking Centers * Visa® Access Card |
Requirements for Home Equity Loans
While applying for Home Equity loans the lenders look for the following requirement in their clients.
- Credit history
- Income
- Home equity
- Loan-to-value (LTV) ratio
Credit history
The credit history is the important requirement for approval of 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 particular time), credit limit and also if all the bills have been paid before deadline
- It also provides the lenders 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.
Cost Involved while applying for Home Equity Loans
There may be certain costs involved while applying for Home Equity Loans. For instance,
- Application fees - this will be charged at the time of applying for the loan and are not refundable in most cases
- Property appraisal cost - property appraisal estimates the current value of the property
- Closing costs – These costs may involve attorney and documentation charges
- Certain Home Equity plans may charge yearly membership fees. Yearly membership fees are the amount that is charged each year 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 Loans
- Before applying for the loan, consider whether the payments can be at the appropriate time
- Compare the offers made by lenders in the market. Consider 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
- Check for change in interest rates. If there is a change, not the periods of change
- Check for Length or duration of the loan
- Check if there is penalty for prepayment. This penalty is 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 thorough understanding of the rules and procedures completely.