Home Equity Loans and Home Equity Lines of Credit
You should shop around if you are thinking of getting a home equity loan, or a line of credit. Compare the financing options offered by banks and savings and Home Equity Lines of Credit, credit unions and mortgage companies. If your home is worth more than the financing, shopping can help you negotiate better terms.
Use Your Home as Collateral
What does it mean for me to use my home as collateral
When you borrow money, your home is used as collateral. The lender “secures” the financing by valuing your home. If you fail to repay the loan, the lender may take your home as payment.
Common ways to use your home as collateral are refinancing, getting a second loan, taking out a mortgage on your home, and getting a HELOC. If you don’t pay the loan back, your home and equity could be lost. Your equity is the difference in what you owe and how much you could receive for your home if it was sold. Even if your home is used as collateral, high interest rates and financing fees can make borrowing money very costly.
What can I do to reduce the risk of borrowing against my house?
Be realistic about your choices and your budget. Consider the potential risks of using your home as collateral. You could lose your home to foreclosure if you don’t make the payments. Before you make any major decisions, consult an attorney, financial advisor or another trusted person. Some lenders are dishonest and target homeowners with limited resources, older people, and borrowers with bad credit ratings. Lenders offer financing based upon the equity of your home and not your ability to pay the remaining balance. The lender may declare your financing in default if you are late on payments. This is usually the first step of the foreclosure process.
What are the signs that a lender is dishonest?
You may be contacted by dishonest lenders to offer financing. They might claim that your credit history is irrelevant. They may try to get you to sign more expensive deals with less favorable terms. Legitimate lenders will allow you to read and understand the terms of the loan agreement before you sign it. They won’t ask you to sign any blank documents or conceal key terms and disclosures. These are some guidelines to avoid being dishonest lenders.
- Do not apply for more than you actually need.
- Do not deal with a lender that wants to finance you with monthly payments larger than you can afford.
- Do not work with any lender that wants to make you lie about your income.
- Do not sign blank forms with lenders. You don’t know what you’ll hear if they fill out the forms later.
- Never sign a contract with a lender that says you cannot have copies of documents signed. Of course you can.
Do not deal with any lender that tells you to ignore the disclosures regarding financing. You must have them.
Avoid any lender that promises you one deal, but then gives you another set of terms, without giving you any explanation.
Home Equity Loans
What’s a home equity loan?
A home equity loan, also known as a second mortgage, is a loan secured by your home. The loan is for a certain amount and must be repaid within a specified time period. The loan is typically repaid with equal monthly payments over a set term. Your lender may foreclose on your house if you fail to repay the loan in full as agreed.
Your income, credit score, and market value of your house will all affect the amount you can borrow and the interest rate at which you pay. Lenders prefer that you don’t borrow more than 80 percent equity in your home.
How can I search for a home equity loan.
You might contact your lender to find out what they can offer you for a home equity loan. You may be able to negotiate a lower interest rate or waive fees. Ask your family and friends for recommendations on lenders. Do your research on the available lenders and then negotiate the best deal for you. Use the Shopping for Home Equity Loan Worksheet.
Ask the lenders to describe the loan options available to you. For tips on how to talk to brokers and lenders, and how to compare their terms, see Shopping for a Mortgage FAQs. Ask questions if you aren’t sure about loan terms or conditions. These terms could lead to higher costs. You should learn more about these important factors:
APR: This is the most important factor to consider when shopping for a home equity loan. As a yearly rate, the APR is the total amount you pay for credit. The APR is generally lower than the loan cost. APR does not only include the interest rate but also points, broker fees and other charges. Points are a fee equaling one percent of the loan amount. It is easier to compare apples to apples when comparing offers by knowing the APR.
- Balloon payment: This payment is due at the end the loan and is often higher than your monthly payment. For interest-only loans, balloon payments are common. Your monthly payments pay interest but not principal. Check your loan terms to see if you are required to make a balloon payment. If you are unable to pay the loan on time, you might need to apply for and pay another loan. This will require you to go through the mortgage process again, paying new closing costs, points and fees.
- Prepayment penalty Some loan agreements include a penalty for early repayment or refinance. You might be required to keep a loan at a high interest rate if the penalty is too high.
- Credit insurance: In the event that you are unable to work, get disabled or become ill, your credit insurance will pay off your loan payments. You may already have similar protection if you have life or disability insurance. If credit insurance is required, lenders must inform you. You will be provided with a statement detailing the cost of credit insurance and then you can sign the contract to purchase it. Do not sign for credit insurance if you do not want it. If it is included in your loan, ask them to remove it.
- Ask for your credit score. Credit scoring is used by creditors to decide whether or not to grant you credit. Your bill-paying history and the type and number of accounts you have, as well as late payments and collection actions, can help predict your likelihood of repaying the loan on time.
- You can negotiate with multiple lenders. Do not be afraid to let brokers and lenders know you are looking for the best deal. Ask each lender to reduce the interest rate, fees or points. Ask each lender to match or exceed the terms of other lenders.
- Read the loan closing documents carefully before signing. Don’t sign if the loan isn’t what you wanted or expected. You can either negotiate modifications or walk away. A home equity loan secured by your principal residence can be cancelled at any time, and without penalty, within three days of signing the loan papers. See The Three-Day Cancellation Rules for more information.
- Unexpected emails are not a reason to wire money. It is possible to get an email claiming it’s from your loan officer, or another real estate professional, that there has been a last-minute modification. You might be asked to wire money to pay closing costs to another account. It’s a scam. You should not open an email from this email. Contact your broker, lender, or real estate agent at a number or email address you trust. Scammers will often ask for money in ways that make it difficult to recover your money. It doesn’t matter how much you paid scammers, the more you act the sooner the better. Find out how to get your money back.
The Three-Day Cancellation Rules Home Equity Lines of Credit
What is the Three-Day Cancellation Rules?
You have three business days to cancel a credit agreement that secured your principal residence or reconsider it. The Three-Day Cancellation Rule is applicable to many home equity loans. It also applies to home equity credit lines, which are discussed below.
Cancellation is possible for any reason. However, you can only do so if your principal residence is used as collateral. This could include a house, condo, mobile home, houseboat, or condominium. A vacation home or second home is not eligible for cancellation.
How long does it take to cancel under the Rule?
You have until midnight on the third day to cancel your loan. After all the above, day one is when you sign the loan. You also receive a Truth in Lending Disclosure form that contains key information about your credit contract. This includes the APR, finance charges, amount financed and payment schedule. Additionally, you will get two copies a Truth in Lending Notice explaining your right of cancellation. If the disclosure form or two copies are not received, or if you were incorrectly informed, you have up to three years.
How can I calculate the third business day?
At closing, you may be given the disclosure and two copies the right to cancel notice. Day One in this case begins after the closing. However, Day One starts on the date that the last three events occurred. If the closing occurs on Friday and that was the last thing that happened, you have until Tuesday midnight to cancel. If you did not receive your Truth in Lending disclosure forms on Thursday, and closed on Friday, you can cancel by midnight on Wednesday. Business days do not include Sundays and legal public holidays, but they are included in cancellations.
The three-day waiting period is the maximum time the lender can take any action regarding the loan. The lender cannot deliver the money to the loan, except in escrow, or start performing services. The contractor cannot deliver materials or begin work if you are applying for a home-improvement loan. During the delay, finance charges can be accrued by the lender.
Home Equity Line of Credit (HELOC).
What is a home equity credit line?
A HELOC is another type of financing. It is similar to a credit card, but it is secured by your house. You are approved by the lender for a specific amount of credit. As long as your credit limit is not exceeded, you are allowed to borrow the maximum amount you need. You can do this by using a credit card or writing a check. You can borrow money from HELOCs for a certain amount of time, called a draw period. You might be eligible to renew your credit line after that. If not, you will likely have to repay the amount due either in full or over time. HELOCs are generally subject to variable interest rates and payments. This means that the rates and payments may fluctuate over time.
How can I repay a HELOC?
A HELOC is a credit line that allows you to make only the amount of the loan you borrowed. HELOCs may also offer tax benefits that are not available with other types of loans. For more information, speak to a tax advisor or accountant.
Home Equity Lines of Credit: Safeguards and Protections
What federal safeguards are applicable to HELOCs
Federal law requires lenders to tell you:
- When you apply for a line of credit, there are usually details about the costs and terms.
- Payment terms and APR
- The creditor charges to open, use or maintain the account. These include an application fee or annual fee or transaction fee
- Other companies may charge fees to open a line of credit such as an appraisal fee, fee for a credit report or attorney’s fees.
Any variable-rate feature
Lenders will need to give you a brochure that explains the main features of HELOCS.
The lender will return all fees paid if you do not accept the HELOC due to a change of terms.
A lender must also give you three business day notice, even on Saturdays, to cancel an HELOC. This usually begins from the date you open the plan or when all material disclosures were received.
- The HELOC can be cancelled at any time.
- You must notify the lender in writing within three days to cancel. After that, the lender must cancel the security interest in your home. They must also return any fees paid for opening the plan.
- You may be able to cancel the HELOC within three years of opening the plan if you fail to provide the required notices and disclosures.
See The Three-Day Cancellation Rules for more information.
If you pay your agreed upon amount, your lender will not close your home equity plan. They may demand payment in full or modify the terms of your account.
Your lender can stop credit advances from your account if interest rates are higher than the maximum rate in your agreement. This will depend on what your contract says.
If the value of your home falls below the appraised amount or if the lender believes that you are likely to be unable or unwilling to pay your monthly payments, the lender may also freeze or reduce your credit line. You can talk to your lender to try to restore your credit line, or you can shop for a mortgage to pay off the previous line of credit.