Guidelines and Parameters
Features for Home Equity Lines of Credit
- Variable Rate, usually tied to the Prime Rate
- Open Line of Credit, as principal is paid down Line of Credit can be reused
- Funds can be used for anything once loan is established
- Interest paid is tax deductible
- Maximum line amount is based on loan to value or the equity available in your property. Most Equity Lines of Credit will have a line cap.
Who is it Right For?
Home Equity Lines of Credit are ideal for borrowers:
- To avoid PMI on a purchase by using the Equity Loan to get their first trust LTV to 80%
- Are not afraid of the possibility of a fluctuating interest rate
- Have the discipline to pay down the line but want the ability to reuse
- Consolidate and payoff unsecure debt
- Establish equity reserves that can be used when needed by drawing against the line.
A second mortgage or junior-lien is a loan you take out using your house as collateral while you still have another loan secured by your house. Home equity loans and home equity lines of credit (HELOCs) are common examples of second mortgages. Some second mortgages are “open-end” (meaning you can continue to take cash out up to the maximum credit amount and, as you pay down the balance, can draw again up to the same limit) and other second mortgage loans are “closed-end” (in which you receive the entire loan amount upfront and cannot redraw after that).
The term “second” means that if you can no longer pay your mortgages and your home is sold to pay off the debts, this loan is paid off second. If there is not enough equity to pay off both loans completely, your second mortgage loan lender may not get the full amount it is owed. As a result, second mortgage loans often carry higher interest rates than first mortgage loans.
Home Equity Loans
|Cost certainty of the fixed rate loan programs that have a fixed amortization schedule so you know exactly what your payment will be each month|
|Become a savings by creating equity as a result of the paydown of principal you can see each month in an amortization schedule|
|Once the mortgage is paid down you cannot reuse the equity that you establish|
|To reuse the equity you have established you will have to get a new loan along with the costs to take it out again|
|The fixed rate comes at a higher cost monthly as the interest rate is typically higher than the first trust mortgage or the comparable Line of Credit|
Home Equity Lines of Credit
|The ability to reuse your credit line based on total equity line established over and over again as you pay the balance down|
|Equity Line of Credit can offer a teaser rate giving you a lower interest rate and payment than the fixed rate Equity Lines|
|The cost to reuse your credit line is only the interest against the outstanding prinicipal owed|
|You will only pay interest on the outstanding principal balance of the amount borrowed|
|If you only maintain the minimum monthly payment you will be paying only interest. To reuse your credit line you must pay down the balance by paying more than the minimum payment|
|The lower teaser rate and/or interest rate comes at a price as the index attached to almost all credit lines follow the Prime Rate and can fluctuate from month to month|
|The ability to borrow against the Line of Credit usually has a 10-15 year window and then you must repay both principal and interest|