Using your home as collateral for a large
amount of credit is an easy and efficient way to borrow.
Equity is the difference between your home's appraised,
fair-market value, and your outstanding mortgage balance.
If you need a considerable amount of cash for whatever reason,
the more equity you have in your home, the more sense it
makes to borrow against it at today's low interest rates.
Low Interest Rates and Tax Deductibility
In the last 20 years, the practice of borrowing
against the value of a home has skyrocketed in popularity.
When federal tax changes in 1986 eliminated deductions for
most consumer purchases, home equity loans became a way
to buy goods and still get a deduction.
Fixed-Rate Loan or Line of Credit?
There are two types of home equity loans:
fixed-rate term and lines of credit. Both are sometimes
referred to as second mortgages, because they're secured
by your property, just like your original mortgage.
Home equity loans and lines of credit are
usually for a shorter term than first mortgages. The most
common type of mortgages runs 30 years, while equity loans
typically have a life of 5 to 15 years.
A home equity loan, or term loan, is a one-time
lump sum that is paid off over a set amount of time, with
a fixed interest rate and the same payments each month.
Once you get the money, you cannot borrow further from the
loan.
A home equity line of credit (HELOC) works
more like a credit card. You are allowed to borrow up to
a certain amount for the life of the loan -- a time limit
set by the lender. During that time you can withdraw money
as you need it. As you pay off the principal, your credit
revolves and you can use it again. For example, let's say
you have a $10,000 line of credit. You borrow $5,000, but
then pay back $3,000 toward the principal. You now have
$8,000 in available credit. This gives you more flexibility
than a fixed-rate home equity loan.
Credit lines have a variable interest rate
that fluctuates over the life of the loan. Payments will
vary depending on the interest rate, and how much credit
you have used. When the life span of a line of credit has
expired, everything must be paid off. A lender may or may
not allow a renewal.
Lines of credit are accessed by specially
issued checks or a credit card. Lenders often require you
to take an initial advance when you set up the loan, withdraw
a minimum amount each time you dip into it, and keep a minimum
amount outstanding.
Financial institutions negotiate a home
equity loan just like they do a mortgage: You have to pay
off the loan or line of credit when you sell the house.
Which type should you choose?
It depends.
There are some scenarios where the choice
is obvious. For example, let's say you need $7,000 to pay
for your daughter's wedding next month, and $3,000 to fix
your roof, which will take a week. You know exactly how
much you need, and both amounts are due in full fairly quickly.
If you don't have plans to borrow again, a straight home
equity loan for $10,000 is more suited to your purpose.
But if you need money over a staggered period
of time -- for example, at the beginning of each semester
for the next four years to pay for your son's schooling,
or for a remodeling project that will take three years to
finish -- a line of credit is the better choice. It gives
you the flexibility to borrow only the amount you need,
when you need it. And if you borrow relatively small amounts
and pay back the principal quickly, a line of credit can
cost less than a home equity loan.
This is where GIA Mortgage can help. We
can help you assess your situation and advise you on your
best course of action. We can arrange a home equity line
of credit up to 100% of the value of your home, even with
a no-income verification or stated income.
Massachusetts Lender License # MC3564
