Home Equity Line of Credit: The Facts

A home equity line of credit can be a great way to use your home equity to finance big ticket items such as home improvements, paying off high-interest debt, or buying a second home.

What Is a Home Equity Line of Credit?
A home equity line of credit (HELOC) is a type of second mortgage . The way a HELOC works is very similar to the way a credit card works. Your home equity is used as the collateral for the loan and you receive a line of credit from which you can draw money.

Benefits of a Home Equity Line of Credit
Using your home equity line of credit for home improvements, consolidating your high-interest debts, or keeping a "rainy day" fund, is a better financial alternative than using your credit cards. Here are the top 4 home equity line of credit benefits:

You get a lower interest rate than you would with your credit cards. That means you pay less interest over the life of the loan.
You get tax advantages that are not available with credit cards. With a home equity line of credit, the interest is usually tax-deductible.* Interest on credit cards is not tax-deductible.
You get flexibility in your payment options. Lenders like Quicken Loans offer interest-only options to help make your payments more flexible. With an interest-only home equity line of credit, you have the option to pay only the interest for a pre-determined amount of time or pay interest plus as much or as little principal as you want.
You get much larger credit limits. Quicken Loans offers home equity lines of credit up to $500,000. This is a great option to have when making a large purchase, such as remodeling your kitchen or adding an addition to your home.
How Does a Home Equity Line of Credit Work?
A home equity line of credit has several unique characteristics. Here is a quick overview:

During the initial years of the loan, you are usually only required to make interest-only payments and you only make payments if and when you draw money from your account.
After the initial years of the loan, the full balance is amortized and paid off over remaining years. An initial minimum draw (taking the money in cash) is sometimes required at closing. However, Quicken Loans does not require an initial minimum draw on HELOCs.
Like any standard loan, the interest rate and annual percentage rate (APR) are calculated based your credit score , and the combined loan-to-value ratio (CLTV) . Generally, the lower CLTV ratio you have, the lower your interest rate and APR will be.
Your interest rate adjusts as the result of an index plus a margin . The index, which can change, is the Prime Rate as published in the Wall Street Journal at the time of the adjustment period . The margin, which can not change, will be determined at the time of your application.

Applying for a Home Equity Line of Credit

Here's how the Quicken Loans home equity line of credit application process works:

First, we ask for some basic information about you, your income and the property. Your Social Security number is necessary to pull a copy of your credit report. There's generally less paperwork involved, so closing on a home equity line of credit is quicker than a standard first mortgage .
Quicken Loans can approve you right over the phone, schedule your closing online, and close your home equity line of credit in as little as 7-10 days.
Closing fees are generally required; however, Quicken Loans has eliminated most closing fees. In order to close your loan, you will likely have to pay local city, county and state recording fees and taxes. Depending on the state you live in, you may also be charged attorney fees. These closing fees can either be deducted from your line of credit or you can bring a cashier's check to pay for them at closing.
If you would like to learn more about home equity lines of credit, call us at 800-251-9080 to talk to a Quicken Loans Home Loan Expert.

* Please consult your tax advisor.

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Which Home Equity Loan is Best for You?

Deciding which home equity loan is best for you depends on two things:

Do you want to receive your money in one lump sum?
What do you need to use the money for?
There are three ways to turn your home equity into usable cash:

1. Cash-Out Refinance
When you take a cash-out refinance, it means you're refinancing your existing loan to a larger amount than what you owe and taking the difference in cash. You receive your money in a lump sum and you might use the cash for home improvements or debt consolidation. If the mortgage interest rate on your existing home loan is higher than current rates, it may make sense to refinance this way.

2. Home Equity Loan
If you have a great mortgage interest rate and don't want to refinance your existing mortgage, a home equity loan might be the way to go. A home equity loan is a second loan that you take out in addition to your first mortgage . It allows you to get cash from your home equity.

A home equity loan takes less time than refinancing your first mortgage and is a good choice if you'd like your cash in a lump sum. Again, you might use this for home improvements or paying off high-interest credit card debt. You might also use it to pay medical bills or finance a second home.

3. Home Equity Line of Credit
A home equity line of credit (HELOC) is different from the first two options. It works similar to a checking account or credit card except that it uses the equity in your home as the revolving line of credit. You pay only if and when you use the money. But, unlike credit cards, the interest is usually tax-deductible.*

With a home equity line of credit, you have the choice of getting a lump sum at closing or only part of your money and drawing on the rest when you need it. Unlike a home equity loan or a refinance, you can get a home equity line of credit in as little as ten days.

A home equity line of credit can be a good choice if you need to access your money more than once, like when you're renovating your house and need to pay different contractors at separate times.

If you'd like to know more about choosing the right home equity loan, call us at 800-251-9080 to talk to a Quicken Loans Home Loan Expert.

* Please consult your tax advisor.

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Remodeling with Home Equity Loans: The Advantages

There are some real advantages to using home equity loans for home improvements. You can borrow enough to completely remodel your home, or just to make some small specific alterations. Lenders don't place restrictions on the type of project, as long as it conforms to your local building code requirements. Usually, you have the option to do the work yourself or hire a general contractor. However, if you aren't a licensed contractor, some lenders may require you to hire a licensed professional for the parts of the project that require technical knowledge, such as electrical wiring.

The right loan
Before you apply for a home improvement loan, consider the type of project the money will be used for. If the project has a set price that will be paid upon completion such as replacing the roof, a home equity loan for a fixed amount is a good choice. These loans give you a lump sum that you pay back in monthly installments with a fixed interest rate.

If the project is large, like remodeling the kitchen, where the cost can increase as the work progresses, a home equity line of credit (HELOC) is the better option. A HELOC has the same flexibility as credit cards. In the case of a HELOC, your lender would give you a credit card or a checkbook, and you could withdraw money in varying amounts, as needed.

Home equity loan rates
A home equity loan's low interest rate and tax deductibility are additional reasons why it's often used as a home improvement loan. Terms for such loans can range from five to 30 years. The minimum amount you may borrow is generally about $10,000. However, most lenders will limit a home equity loan for home improvements to a maximum of $1,000,000.

Remodeling your home can significantly increase its value. When you need to finance a home improvement project, regardless of the size, a home equity loan is a good choice.

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Interest Rate Roundup

Here's a look at the state of interest rates on five common consumer banking products and the latest rates from Bankrate.com's weekly national survey of large banks and thrifts conducted Jan. 31, 2007.

Mortgages
Rate: 6.42 percent (30-year fixed) Average points: 0.34
Mortgage rates took a big jump to their highest levels since the days when Karl Rove was bragging about keeping Republican control of Congress. That was in late October, to be more precise. Since mid-December, the economic news has been more good than bad overall, and that was the case this week. The highlight was the report of gross domestic product in the final three months of 2006. Total economic output increased during that period at an annual rate of 3.5 percent. That's much better than expected. But inflation was moderate. The strong economic growth, coupled with a fairly good inflation report, prepared the field for a modest increase in interest rates. The average 30-year fixed rate rose 10 basis points, to 6.42 percent. A basis point is one-hundredth of a percentage point. The average 15-year fixed, which is a popular option for refinancing, rose 12 basis points, to 6.19 percent. On bigger loans, the average jumbo 30-year fixed rose 7 basis points, to 6.63 percent. Adjustable-rate mortgages went up, too. The popular 5/1 ARM rose 9 basis points, to 6.3 percent, while the one-year ARM rose just 2 basis points, to 6.06 percent.
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Home equity products
Rates: 8.13 percent (line of credit); 7.93 percent (loan)
Home equity products barely moved. The average home equity line of credit fell 1 basis point, to 8.13 percent. Fixed-rate home equity loans rose 1 basis point, to 7.93 percent.
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Auto loans
Rates: 7.86 percent (60-month, new car); 8.68 percent (36-month, used car)
Car loan rates are in reverse -- going slowly but backward nevertheless. The 60-month new-car loan dropped 2 more basis points this week, to 7.86 percent. The 48-month loan also declined 2 basis points to 7.81 percent, and the 36-month loan is down 3 basis points, to 7.73 percent. Used-car loan rates also retreated 2 basis points: the 36-month used-car loan is 8.68 percent and the 48-month used-car loan is 8.79 percent. January sales are predicted to be higher this year than last, according to Edmunds.com, and others concur. Kelley Blue Book says traffic on its auto-pricing site has increased, too. If you're contemplating purchasing a new or used car, start with Bankrate's calculator to see how much you can afford.
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Certificates of deposit
Yields: 3.77 percent (1-year CD yield); 4.02 percent (5-year CD yield)
Another week of barely any movement in CD yields. This could start to change soon. The economy is looking pretty darn healthy and inflation, while sticking its neck out here and there, seems fairly tame. Additionally, Treasury yields climbed a bit recently and this all bodes well for CD yields in the weeks ahead. This week, the average one-year yield stayed right where it was last week, 3.77 percent. The six-month also didn't budge, coming in at 3.55 percent, and the five-year average dropped a basis point to 4.02 percent. On the jumbo side, the one-year held steady at 4.24 percent while the five-year dropped a basis point to 4.26 percent.

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Credit cards
Rates: 13.36 percent (standard fixed); 14.56 percent (standard variable)
The average interest rates on all but the standard fixed-rate card declined this week. The standard fixed rate is 13.36 percent, up 3 basis points from last week. The variable dipped to 14.56 percent, down from 14.72 percent. For all cards -- standard, gold and platinum -- the fixed rate edged downward -- 0.14 percent to 11.75 percent, and the variable rate went to 13.84 percent, from 13.93 percent. Prior to the holidays, it was reported that more consumers expected to use debit cards than credit cards during their shopping. This week TransUnion's TrueCredit.com and GfK Roper Public Affairs and Media released a study indicating that 35 percent of consumers made fewer purchases by credit card, down from 43 percent in 2005. Eleven percent said they had more debt this year and 29 percent say they had less. Bankrate's Financial Literacy program has a work sheet that will help you deal with debt.

By Holden Lewis, Ellen Cannon and Laura Bruce • Bankrate.com

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Home Equity Loans and Second Mortgages: Is there a difference?

A second mortgage is any loan where 1) your house is used as collateral in case you default on the loan, and 2) you already have a primary or "first" mortgage that's also based on the value of the home.

When you use a mortgage to purchase a home, that's your "first mortgage." Subsequently, you may decide to take out a home improvement loan or a home equity line of credit (HELOC). Since you already have one mortgage on your home, these home improvement loans that come later are "second mortgages."

Second mortgages mean increased lender risk
Because second mortgages or home equity loans are riskier for the lender, they generally carry slightly higher interest rates than you would expect to pay for a first mortgage. They represent more risk because if you stop making payments, the lender who holds the first mortgage gets paid before the lender who holds the second.

Types of second mortgages
In practice, there's no difference between a second mortgage and a home equity loan. But there are different types of second mortgages/home equity loans, and depending on which one you choose, you'll have different payment terms and home equity loan rates. For example, a HELOC works much like a credit card. You have a line of credit, and only pay interest on the amount you borrow. Once you pay off your balance, the interest stops accumulating. With a home equity loan, you borrow a lump sum and pay it back over time, the way you would for any other installment loan.

The good news is that you don't have to worry too much about the glossary of terms, because when you apply for a loan, your banker or mortgage loan officer will explain them clearly to you. The main thing to understand is that, when applying for a second mortgage, you have many choices. Make sure to shop around and learn as much as you can before picking the one that's right for you. That way, you'll ace this major test in your financial life.

By MortgageLoan.com

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The Right Time to Tap Home Equity

Do you think that you're sitting on a gold mine? If the value of your home has grown at dizzying speeds over the last few years, and your equity balance is looking juicy, it may be time for some prospecting. But is your timing right?

You Need It
If you have a major home improvement project, unexpected medical expenses, or lofty plans for your child's education, the equation is simple. After maxing out better options like Stafford loans for education, or secondary insurance plans for medical needs, it's just a matter of whether your home equity has grown enough to cover your needs. A home improvement loan or other second mortgage should fit, and foot, the bill.

For large expenses, when you know exactly how much money you desire, a home equity loan is often the best option. A HELOC can be a better choice when your expenses are spread out over a longer period of time in smaller increments. With a fixed-rate home equity loan, you're paying interest on the entire loan balance from day one. With a HELOC, you only pay interest on your current balance-not on the entire credit line available to you.

You Want It
If you don't have any pressing financial needs, but just want to lock in some of your real estate profits, you have a tougher decision to make. Home equity loan rates have been rising over the past few years, and you might want to lock in a lower rate now if you think the trend will continue. A fixed-rate home equity loan will do the job, whereas an adjustable-rate HELOC will do better in times of shrinking interest rates.

On the other hand, home values haven't stood still, either. You might get more money out of your property if you wait another year or two. Then again, you could take the plunge today, and refinance your home equity loan later on, if things look better.

Analyze your situation, and determine how you'd like to pay off the credit line. This could be the perfect time to apply for a second mortgage. There's no time like the present, especially if there's gold in "them thar hills!"

Via Mgl

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What home equity debt is

A home equity loan or line of credit allows you to borrow money, using your home's equity as collateral.

Wait. Don't click to another page. If the above paragraph seems like gibberish, you have surfed to the right place. We will explain what home equity is, what collateral is, how these loans and lines of credit work, why people use them, and what pitfalls to avoid.

First, some definitions:

Collateral is property that you pledge as a guarantee that you will repay a debt. If you don't repay the debt, the lender can take your collateral and sell it to get its money back. With a home equity loan or line of credit, you pledge your home as collateral. You can lose the home and be forced to move out if you don't repay the debt.

Equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have more than one on the property).


Example:


Let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. The day you buy the house, your equity is the same as the down payment -- $20,000: $200,000 (home's purchase price) - $180,000 (amount owed) = $20,000 (equity).


Fast-forward five years. You have been making your monthly payments faithfully, and have paid down $13,000 of the mortgage debt, so you owe $167,000. During the same time, the value of the house has increased. Now it is worth $300,000. Your equity is $133,000: $300,000 (home's current appraised value) - $167,000 (amount owed) = $133,000 (equity)
House purchase price: $200,000
Amount borrowed: -$180,000
Down payment/equity: $20,000

Five years later
Amount borrowed:
$180,000
Principal paid: -$13,000
Amount owed: $167,000

House's appraised value: $300,000
Amount owed: -$167,000
Equity $133,000



A home equity loan (or line of credit) is a second mortgage that lets you turn equity into cash, allowing you to spend it on home improvements, debt consolidation, college education or other expenses.

Equity loans, lines of credit defined ...
There are two types of home equity debt: home equity loans and home equity lines of credit, also known as HELOCs. Both are sometimes referred to as second mortgages, because they are secured by your property, just like the original, or primary, mortgage.

Home equity loans and lines of credit usually are repaid in a shorter period than first mortgages. Most commonly, mortgages are set up to be repaid over 30 years. Equity loans and lines of credit often have a repayment period of 15 years, although it might be as short as five and as long as 30 years.

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Protect Yourself From Home Equity Loan Scams

It's become almost instinctive these days for some people to rush to tap into the equity in their homes when they find themselves in need of cash. That's because of the growing awareness that home is where the money is. However, it pays to stay alert as you pursue funding, since your budget will be affected for years to come.

There are a wide variety of home equity loan scams out there. Whether you're planning to tap your equity through a home improvement loan, a home equity loan, or a home equity line of credit (HELOC), here are some tips to keep you out of trouble.

No rose-colored glasses: Don't be dazzled by dollar signs. Make sure that you've considered all the costs and conditions of any loan before signing on the dotted line. Since your intention is to solve a short-term problem with a long-term solution, consider whether the loan you choose makes sense over the long haul.

Don't succumb to pressure: Avoid being bullied into accepting home mortgage products that you don't want, such as credit insurance. Shop around for the extras that you do want before allowing them to be rolled into your loan. They may be cheaper somewhere else. If you can't reasonably handle the monthly payments or the loan costs, reject the offer. Follow your gut instinct-it's probably right!

Watch what you sign: Read everything carefully before you sign anything, and make sure that you understand it. Don't put your John Hancock on anything that has blank spaces that could be filled in later.

Don't deed your property: If you think that you should deed your property over to another party for any reason whatsoever, consult with an attorney first.

Even if you're desperate, act like you're not. Take your time, stay on your toes, and make a good decision. You'll need to live with it for a very long time. And you'd like to live with it inside your own home, not on the street because you inadvertently lost it.

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Home Equity Loans: Just the Facts

If Dragnet's Sergeant Joe Friday were to shop for a home equity loan, you could bet that he'd look past the fluff and go straight for the facts. Incorporating the legendary police officer's "just the facts" mentality is your best approach to solving the mystery of home equity borrowing. So put on your detective hat, and flip open that notepad.


HELOC vs. home equity loan
Home equity loans falls into two categories: home equity lines of credit (HELOCs) and home equity loans. Both are secured by a second lien on your property. A HELOC is a revolving credit line, while a home equity loan is a form of closed-end borrowing.

A HELOC allows you to advance cash or make principal payments at your discretion. The interest rate is variable, and minimum payments generally won't reduce the principal balance significantly.

A home equity loan provides a one-time sum of cash. It carries a fixed interest rate and monthly payment. Home equity loans are sometimes called home improvement loans, because they're well suited for fixed budget projects, like remodeling your living space.

Ups and downs of home equity borrowing
The number one advantage of a HELOC is its flexibility. You can access more cash or make principal payments without penalty. The low minimum payments are budget-friendly, as well.

A HELOC's variable interest rate structure exposes you to the risk of rising rates and increasing minimum payments. Also, since the HELOC offers you the option to pay only interest, you could be left with a lump sum due at maturity.

Alternatively, home equity loans amortize with a fixed rate of interest. As a result, you know exactly how much you need to pay monthly until the loan is paid off.

Evaluating the Trade-Off
If you want to tap into your home's equity, research prevailing HELOC rates and compare them to home equity loan rates. Consider how your situation may be affected if rates rise. Then, decide how important the flexibility is to you, and whether the trade-off makes dollars and sense.

The equity borrowing mystery is a tough case to crack, but the investigative style of Sergeant Friday should enable you to find the killer loan.

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