Home Equity Loans & Home Equity Lines of Credit

Look around for home equity loans and home equity lines of credit if you are considering a loan. Compare the different financing options available from banks, savings and loan companies, credit unions, mortgage companies, and credit unions. When your home’s value is the collateral for the financing, shopping will help you find better terms and better deals.

Collateral: Use Your Home

What does it really mean to use my house as collateral?

Your home can be used as collateral to borrow money. The lender can also take your home to pay for the debt if you don’t repay the financing.

Home equity financing can be used in many ways, including refinancing your house, getting another mortgage, taking out an equity loan or getting a HELOC. You could lose your home or any equity you have if the financing isn’t repaid. Your equity is the difference between your mortgage payment and what you would get for your house if you decided to sell it. It can be very costly to borrow money even if your home serves as collateral.

How can I lower the risk of borrowing against a home?

Take into account your options and your budget. You must consider the risks associated with using your home to secure collateral. Your home could be foreclosed if you are unable to pay the money. Before making any decisions, speak to an attorney or financial advisor. Some lenders will not lend to homeowners with low incomes, seniors, or borrowers with poor credit histories. They will finance you based on your equity and not your ability repay the debt. Lenders can declare your financing as in default and send you a notice of default if you default on payments. Usually, this is the first step in the foreclosure process.

What are the warning signs for a dishonest lender

Some lenders might try to scam you into financing. They might say that your credit history doesn’t matter. They might try to convince you into getting more expensive agreements that have less favorable terms. Recognize that genuine lenders will take the time to explain the terms and give you the opportunity to do so in writing. They will not ask you for blank documents, or hide key terms and disclosures. There are some tips to help you spot dishonest lenders.

Don’t allow a lender to ask you for more than what you need.
Do not agree to a lender who will require you to make monthly payments that are more than you can afford.
Never lend money to a lender who will tell you something false, such as that your income is greater than it actually is.
Lenders who insist on signing blank forms should be avoided. It’s impossible to know what they will say if you ask them later.
Never agree to work with a lender who claims you don’t have copies. Of course you can.

Never deal with a lender who says you should not read the disclosures. They are required by law, so ensure you get them. Before you sign any financing agreement, make sure you understand and read them.

Be wary of any lender that promises one deal but offers you a completely different set of terms when you apply.

Home Equity Loans

What is home equity?

A home equity loan (sometimes called a second loan) is a loan that is secured by your house. The loan must be repaid in a predetermined time frame. You usually repay the loan in equal monthly installments over a specified term. Lenders can take your home if you don’t pay the loan back as agreed.

The amount of money you can borrow, as well as the interest rate, will depend on your income, credit rating, and your home’s market value. Most lenders will only allow you to borrow 80 percent of your equity.

Where can I find a loan for home equity?

Contact your current lender to discuss a home equity mortgage. They might be willing to offer a discount on your interest rate and fees. Ask family members and friends to recommend lenders. Next, do your research about the offers of lenders and prepare to negotiate the deal that is best for you. Use the Shopping For a Home Equity loan Worksheet.

Ask your lenders for information about the loan options they offer. Check out Shopping for a mortgage FAQs to learn how to speak to lenders and brokers, and how you can compare the terms of their offers. Ask questions if the terms and conditions of your loan are not clear to you. They may lead to higher prices. These are some important points to consider:

APR: When shopping for a home equity mortgage, the Annual Percentage Rat (APR), is the most important number to compare. The APR, or annual rate, is the total cost of credit. The APR will generally be lower, which means that your loan costs will be lower. APR is the annual interest rate. However, it also includes broker fees, points, and other charges. Each point is one percent of loan amount. When comparing offers, it is easier to see the APR.

The balloon payment: This is an extra payment that you make at the end of your loan. It’s usually much higher than your normal monthly payment. When you have interest-only loans, balloon payment are common. These payments go towards interest only and don’t pay down the principal. If your loan terms specify that you will owe a lump sum, check it out. If you cannot pay it on the due date, you may have to obtain and pay for another loan. This means you will need to go through the mortgage application again and pay new closing costs and points.
Prepayment penalty – Some loan contracts have a penalty if your loan is not paid in time or you refinance. A high penalty might mean that you have to keep a loan with high interest rates because it is too costly to pay off.
Credit insurance If your health or disability is severe, credit insurance (if you have it) will cover you for the loan payments. If you have disability or life insurance, you may already be covered. Lenders will inform you if credit coverage is required for your loan. If it is not, you will receive a statement outlining the cost and you are then able to sign the agreement. Don’t sign for credit insurance if this is not something you want.
Ask about your credit score. Credit scoring is a tool creditors use to determine whether they will give you credit. Credit scoring is a system that helps creditors determine whether to give you credit. It includes information such as your bill-paying record, your account types, late payments, outstanding debt, and how long your accounts have been open. This all helps predict the likelihood that you will repay the loan on the due date.
Negotiate with more lenders. You shouldn’t be afraid of asking brokers and lenders to compete for your business. Let them know that the goal is to find the best deal. Ask each lender for a lower interest rate, fee, or point. Ask them to meet or exceed the terms set forth by the other lenders.
Be sure to read all the closing papers before you sign. Do not sign if you aren’t satisfied with the loan. Accept changes, or walk away. The home equity loan you have on your principal residence is generally canceled within three days. You can find more information at The Three-Day Cancellation Policy.
In response to unanticipated emails, don’t wire money. A loan officer or other professional might send you an email saying that there was a last minute change. They may ask you to wire the money for closing costs to another account. This is a scam. This email is a scam. You need to contact your broker, lender or real estate professional at an address or number that you can verify. Scammers may ask you to make payments in ways that make obtaining your money back difficult. The sooner you take action, the better, no matter how low you paid the scammer. Find out how you can get your money back.

The Three-Day Cancellation Policy

What is the Three-Day Cancellation Policy?

You have three days (including Saturdays) to review a signed credit agreement that protects your principal residence and cancel it without penalty. The Three-Day Cancellation Rule applies for many home equity loans.

Cancellations can be made for any reason but only if you are using your primary residence as collateral. It could be a home, condo, mobile house, or houseboat. You cannot cancel a vacation home or second residence.

What time do I have to cancel my order under the Rule?

Your loan can be cancelled up to midnight on the third business day. After these events have occurred, day one starts. You sign the loan and receive a Truth in Lending disclosure sheet with key information, including the APR and finance charge. The disclosure form also includes the payment schedule and the amount financed. Two copies of a Truth in Lending notice explain your rights to cancel.

What is the best way to determine the third day of business?

The disclosure and two copies on the right-to-cancel notice may be available at closing. Day One of that scenario is after the closing. If you have the disclosure form and two copies of notices before or after closing, Day One will begin on the last of those three things. You have until midnight Tuesday to cancel if closing takes place on a Friday. You have until Wednesday midnight to cancel if you didn’t get two copies of your Truth in Lending notice by Saturday but received your Truth in Lending disclosure on Thursday. For cancellation purposes, business day does not include Saturdays. It does not include Sundays or legal holidays.

The lender cannot take action on the loan during this three-day wait period. The lender can’t either deliver the loan money (other than in an escrow) or start performing services. Contractors can’t deliver materials or start work on a home improvement loan. During this delay period, the lender may begin to charge finance fees.

Home Equity Line of Credit

What is a Home Equity Line of Credit?

This financing, also known by a HELOC, can be revolving credit like a credit line, except that it is secured with your home. Lenders approve you for a limited amount of credit. In general, the credit limit you have is set by the lender. This means that you can borrow what you need at any time, using a credit or check, provided you do not exceed it. There is an initial period, known as a draw period, in which you can borrow from HELOCs. The credit line may be renewed after this time, but you may not be able to borrow from it again. In that case, you will have to repay the amount due, either by paying over time or the whole outstanding balance. HELOCs typically have variable interest rates, which can change over time.

How do I repay a HELOC

HELOCs are a type of credit that only allows you to pay the amount you borrow. HELOCs can offer you tax advantages that aren’t available for other types of loans. Talk to your tax advisor or accountant for more details.

HELOCs are protected and secured

What federal safeguards do HELOCs need?

According to federal law, lenders are required to inform you:

You will be informed about the terms and cost of the credit line in most cases, once you have submitted an application
The APR and payment terms
To open, use, and maintain an account, the creditor will charge a fee (application fee, annual fee, transaction fee)
Charges incurred by other companies in order to open the credit line, such as an appraisal fee or fee to obtain a credit score, or fees for attorneys’ fees

About any variable rate feature

Lenders should give you a brochure describing the basic features of HELOCS.

You can cancel your HELOC if the terms are different than you expected. The lender must refund all fees.

The lender must give you three days notice to cancel a HELOC. This includes Saturdays but not Sundays. It usually starts from the time you opened the plan. When you receive all material disclosures.

You can cancel your HELOC at any time.
Within the three-day deadline, you must notify the lender by writing. The lender must then cancel its security interest and return any fees it paid to open the plan.
The HELOC may not be cancelled if the required disclosures and notices are not given within three years.

You can find more information at The Three-Day Cancellation Regulation.

In general, once your home equity account is opened, the lender can not terminate your plan or demand that you accelerate payment of any outstanding balance.

Your contract may state that the lender may suspend credit advances for you if your interest rates exceed the maximum rate allowed by your agreement.

Your lender can also reduce or freeze your line of credit if your home’s value falls below the appraised value or if they believe you will not be able to pay your bills due to material changes in your financial situation. Talk to your lender if this happens. You could also shop around for a new mortgage to pay off your existing line of credit.