Home equity line of credit

skrepka

16 years ago

We are getting close to buying our first house. We are putting 20% down payment.

We want to get a line of credit on the house but don't know what is involved.

Do do this though out mortgage broker or through someone else?

Is it done at the time of closing or after closing?

Do we have to specify the amount we want or is it calculated based on some criteria?

If we don't plan of using it right away, can it just sit there until we need it?

If/when we need to use it, how do we get the money?

How is the interest on amount used calculated? Is it determined when we open the line or the interest at the time we use it?

How is it paid back? Are there common terms or is it individual? Is it repaid in 1 year, 5 years, 10? I have no idea.

If there is anything else that we need to know, but did not ask, please tell us or point to where we can find answeres.

Thanks everyone.

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Comments (5)

kframe19
16 years ago
Most equity lines of credit are based on the value of the home vs. the amount of the mortgage you owe and take into consideration the LTV (loan to value) ratio.

Your best bet is to shop around at banks and financial institutions. Your mortgage broker may or may not offer an equity line of credit; my experience is that they normally don't.

If you're borrowing through a financial institution (such as a credit union or a bank) you may be able to do a bundle offering subject to that institution's lending rules.
tishtoshnm Zone 6/NM
16 years ago
There is an active thread right now about some problems people are having with HELOCs. We have a home equity loan which was obtained by our broker when we financed our house. Rates on home equity loans are fixed but they are higher than HELOCs. Just know that a HELOC's rate is generally variable, meaning your rate can go up and may even go up a lot. If the Fed decides to battle inflation and starts raising interest rates, then your rate will go up to.

At the time we did our loan, our broker said that he would be unable to do anything more than 90% of the home value but banks may even be sheepish about that in the current market. Bankrate.com has many informative articles and may be a good place to start learning more about using your home equity.
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Any closing costs or fees whether to the bank or title company? This would be a big deciding factor mor than anything else probably. You should not be paying any fees Make sure there are no prepayment penalties either 5% is an amazing rate. What bank did you get this at? Prime +5 is about 8.75% so huge difference. Run the numbers. If you are taking 100,000 over a year. Assuming no fees in either case, would be 8750 v 5000 so loan is better. However, if it takes you longer to do the renovations, then you might only be taking out 50k over the first 3 months, saving several 1000 dollars. Also, with a line as you start paying it back your rate effectively reduces however, assuming you do this for 6 months and pay back interest only , it would be 4375. However if you only borrow half the amount for the first 3 months until the work is complete, then it would be 2187 + 1093 = 3280 over 6 months interest only with the line. This assumes interest rates stay the same, they could go up which would cost even more With the loan it would be 100k over 6 months, interest only would be 2500 so this is the better deal in my scenario. so assuming there are no closing costs or fees, you are doing interest only and there are no prepayment penalties I would do the loan
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A couple of thoughts: - the bank probably is not counting that third rental income because you don't have it. Renting is speculative. I don't know what the rental market is like on LI anymore, but around here it is not uncommon to see "For rent" signs on apartment buildings for months on end. There also are the expenses incurred as a landlord -- it's not all an income stream and that's why the bank discounts the income. - another bank (a smaller, hungrier one) or even a credit union (if you can belong to one) might be a better bet for your business. - a bridge loan might work for you; it would go on the equity you now have in your properties and carry you until the rental income is a reality.
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I'm an ametuer so take my comments at face value. First, understand that there are two types of loans: Home Equity Line of Credit (HELOC) and a Home Equity Loan. A HELOC works largely like a credit card in that you are approved for a certain amount and then you go spend it and your payments are calculated similar to a credit card. Depends on the agreement, but I know for mine at the five year point I couldn't charge anymore and was set on a payment schedule to pay off at 15 years. A Home Equity Loan is essentially a 15 year term loan from the beginning. They give you a set amount of money with a set payment schedule to pay it off in 15 years. This may be a worthwhile investment but I'll agree with Bill in making sure you can afford it. You mention a 6% rate which may be a guess on your part but in reality if that's the rate you can get then you've got credit problems and should reconsider this adventure.
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Hi Parkejo, Or should we just get a higher mortgage and not touch our savings? Then we could pay down the mortgage with extra payments or refinance down the road. What would you do? Definitely DO NOT bury your safety or retirement money into your real estate equity. This is our third house we would be buying. We are putting down about 50% of the sale of the house and financing the rest. We would not have any PMI to worry with. I know the real estate market is a mess right now. I just don't want to tie our emergency savings into our first mortgage that's all. Just wondering what others have done in a temporary situation. Here's the decision criterion; Recognize that real estate equity is a highly risk-vulnerable place to keep your funds you may be counting on for retirement. How much (what percentage) of your total family net worth is represented in your real estate equity? Make sure you are not over-concentrated (under-diversified) by having too much of your funds at risk. Real estate equity gives zero compounded growth, and only benefits you equal to the after-tax simple interest savings of the leverage avoided. Alternatively, you'll have many diversification options that can provide compounding growth in a tax-sheltered treatment, and in some vehicles you can have "principal guarantees" which assure that you cannot actually lose ANY of your original funds regardless, and in some cases they protect your periodic gains as well. Manage carefully. Under-diversifying in a risk-asset to "save" a relatively low mortgage interest rate, at the costs of compounding growth and safety, can be very hazardous to your retirement. Luck! Dave Donhoff Strategic Equity & Leverage Planner
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zone_8grandma
16 years ago
Any particular reason why you want to get the heloc? You can always apply for one later if you decide you need it.
joyfulguy
16 years ago
I have a fully-secured Line of Credit using stocks and mutual funds which cost nothing to set up, upwards of 10 years ago, I think. There is no maintenance fee and it sits unused most of the time.

I draw against it whenever I want, and the agreement is that I'm required to pay interest only monthly, but can pay more if I choose.

The rate is based at what they call prime, but is more than what the market calls prime ... a month or so ago, my rate would have been 5.25%.

As I have a couple of bank accounts there and use their brokerage arm as a discount broker, I have a feeling from something that was said recently that they're not going to be too worried if I want to borrow more than the amount that would be allowed by the actual collateral that they hold, as I have other assets within their organization.

ole joyful
joyfulguy
15 years ago
I was wrong about using the assets in other areas of their institution as collateral ... it's only the assets which have had certificates issued and which are lodged in their safe, under the jurisdiction of the Line of Credit.

The mutual fund managers issue certificates without charge, and when you turn certificates in to their local office ... be sure to get a receipt. I turned one in some time ago and had them make a photocopy, then sign the pc as having been received. Later there was some question as to whether I had it ... or they did.

When I ask my stockbroker to have certificates issued for stocks that I own, there's a substantial fee for each stock - usually $35.00 - 50.00, more often the latter.

The rate that that the lender would charge me on my Line of Credit now is 4.75% ... which is bank prime.

Someone told me the other day that on his Home Equity L O C, he's paying bank prime minus 1% ... so I'm going to ask my lender whether such a rate is available on mine ... and if not, why not?

If they can't offer a better rate, then I ask my friend who his lender is, pay them a visit and ask whether, if my LOC is backed by stocks and mutual funds, am I eligible for bank prime minus 1% ... and if they say that's O.K., then I go back to my current lender and offer that information, seeing what response they may make.

If they can't alter the rate, I have a choice s to whether to continue with them or to take my assets to back an L O C with the other institution.

ole joyful

Home equity line of credit

Comments (5)

kframe19

tishtoshnm Zone 6/NM

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