Home Equity Credit
More lenders are offering home equity lines of credit, which allow homeowners to draw off their loan as they need it, usually by writing a check. The monthly payment is usually a percentage of the total outstanding principle.
Because this flexibility is the key benefit, be aware that some home equity lines specify a certain minimum be borrowed each time an amount is drawn, or that require an initial cash advance.
Most consumers seem aware of the risks, lenders say. For example, JPMorgan Chase and various rivals offer credit cards to make it convenient for borrowers to tap into lines of credit, yet most people don’t use them often. The amount you can borrow on a home equity loan is, of course, limited by your actual equity. Equity is calculated by subtracting the unpaid balance of your mortgage from the fair market value of your home. Lenders will offer some percentage of equity as a loan amount, usually 75% to 90%.
If you are using the loan to eliminate debt you have to compare the second mortgage interest rate including loan fees if any against the interest rate APR of the debt you are trying to eliminate. For example, if you have $20,000 of credit card debt, it’s most likely at 19%, but your home equity loan could be between 8% to 12%, depending on market conditions.
In this case, it would most likely make sense to get the second mortgage on your home to payoff those cards and other high interest debt like an old car loan that you might have been ripped off on.
The loan can be offered as a lump sum or as a credit line. The lump sum gives you the whole amount of the loan all at once and interest is payable on it immediately. With a credit line, you only use the money as needed, up to an agreed maximum, and interest only accrues on the amount you use.
Also negotiate with more than one lender. Don’t be afraid to make lenders and brokers compete for your business by letting them know that you’re shopping for the best deal. Ask each lender to lower the points, fees or the interest rate. And ask each to meet – or beat – the terms of the other lenders.
Print This Article
