Tapping Into Home Equity

What fees are typical for a HELOC?

HELOC loans often consist of several fees in addition to the amount borrowed and interest payment. Use this quick checklist to compare rates and fees when shopping for a Home Equity Line of Credit:

Application/Origination Fee
Appraisal Fee
Account Maintenance Fee
Title Work
Title Recording Fee
Document Shipping Fee
Notary Fee
Points
Early Closure Fee
Lien Release Fee
Local Mortgage Taxes

Since HELOCs will often wrap the fees and closing costs into the loan itself, these fees can substantially increase the APR of your loan. Be sure you understand the total amount of interest you will pay over the life of the loan and comparison shop for the best fees before making a final decision.

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Does a HELOC make sense?

A HELOC or Home Equity Line of Credit is secured by the equity in your home. The underwriter of the loan uses your home as collateral to repay the debt in the event of foreclosure. A HELOC can serve a useful purpose, but it is important to use it wisely. Never take out more money than you can afford to pay back especially if it could potentially lead to foreclosure.

Used properly, a HELOC allows you to apply for a loan and then use it only when/if you need it. Unlike many loans, a HELOC doesn't require you to use it right away. Instead, you can keep the balance available as an emergency fund instead of using high interest credit cards in the event of an emergency.

Would you benefit from a HELOC loan?

1. My credit is good and I qualify for favorable rates.

2. I have equity in my home to draw upon in a time of need.

3. I carry a very low deductible on my homeowners insurance and my rates have increased. Some homeowners find it beneficial to increase the deductible on their insurance policy and keep a HELOC available in the event of emergencies.

4. I sporadically need large sums of money for short periods of time. For example, to fix up a project and then resell it.

5. I currently rely upon high interest credit cards or other loans for short-term or revolving loans.

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HELOC Versus Second Mortgage - which is better?

If you have equity in your home then you might be shopping for a HELOC or Home Equity Line of Credit but don't forget about a traditional second mortgage. Depending upon your situation, a second mortgage might be a better option.

Not sure if a HELOC or Second Mortgage makes more sense? Here are a few tips to get you started:

1. Understand the APR or Annual Percentage Rate for each. Don't simply look at the number because the APR is calculated differently for each loan. Instead, compare the total amount of interest you will pay.

2. Do you need a specific amount of money with a fixed payment? A second mortgage might make more sense if you intend to use all of the money for one large project.

3. Do you need a flexible spending account to draw upon at will? In this case, a HELOC loan might make more sense because it allows you to use as much of the money as you need (up to your spending limit) when you need it.

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How can I estimate my home equity?

Obtaining a home equity loan is easier than ever thanks to a plethora of easy-to-use online mortgage brokers and banks, but how do you know if you have enough equity to take out a HELOC or home equity loan?

First, it's a good idea to begin by finding comparable homes in your area. Visit homesandland.com to begin your search. Look for home that are in the same proximity, roughly the same age, square footage, amenities and construction type. However, don't depend upon the asking or listing price - instead, you need to examine recent sales data. Sales data is typically available via the local clerk of the court, property appraiser or real estate agent. If you are curious about sales data and don't have the time or inclination to do the research yourself, simply use the Homes and Land real estate agent search tool to contact an agent in your area and request sales data.

Once you have a rough approximation of what homes in your area are selling for, then it is time to have an appraisal of your home performed. An appraisal is not the same as an inspection although they often take many of the same issues into consideration, such as the condition and functionality of the home and structure. However, an appraiser will take the land, location and surrounding area into consideration in addition to the overall appearance of the home.

Finally, the best way to estimate home equity is to use a home equity loan calculator. There are many different types available free online.

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What Questions to Ask Before Obtaining a HELOC

Not sure what to ask when comparison shopping for the best home equity line of credit? Use this convenient checklist to make sure you have covered the important points when shopping for a HELOC.

1. Is there a pre-payment penalty? If yes, what are the terms?

2. What is the draw period and is an initial draw required?

3. Is there a monthly or annual limit on the number of draws?

4. What is the minimum draw amount?

5. What methods are acceptable for accessing funds (debit card, checkbook etc.).

6. What are the total fees and costs?

7. How frequently can the rate adjust?

8. What is the interest rate cap?

9. What triggers a demand for payment in full?

10. Are there transaction fees and if so, how much?

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Should I refinance or not?

To Refinance or Not

Generally, you shouldn't consider refinancing unless you are in a high CAP rate adjustable rate mortgage or if you can save least 1 percentage point off your original fixed rate mortgage. Critics of refinancing and home equity loans often point to the extension of terms and long term cost of interest. However, depending upon the length of time you have held the loan, interest rate and current home equity, refinancing can result in significant reduction in the total monthly cost and time required to pay the loan in full. Instead of obtaining a 30-year mortgage, consider a 15, 20 or even 25-year mortgage instead. The shorter the duration of the mortgage the lower the interest rate. Not only is it possible to save money when you refinance home equity, but if you have at least 20 percent equity in the home then it’s possible to eliminate PMI at the same time!

To Take Cash Out or Not

Many people are able to generate substantial monthly savings simply by refinancing their home without taking cash out; by saving on PMI and lowering their interest rates or extending the duration of their loan, the savings can be put to work paying off high interest debt. Others find the ability to use equity loans to pay off high interest debt and consolidate bills a convenient method to reign in an out of control budget. If you aren’t sure which is the right choice, run the numbers with a trusted debt manager or financial consultant.

Calculate the Return

Begin by deciding how long you will remain in the home. In addition to asking about the monthly payment plan, be sure to know the total cost of the loan itself including points, discount fees, appraisals, credit reports, title insurance, document preparation and other charges. Tally up the total charges, subtract your estimated monthly savings and then divide by the total number of months it will take you to match that amount. If you intend to remain in the house longer than that period of time it takes to break even, then it makes sense to refinance.

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When Should I Not Tap Home Equity

Properly used, home equity loans or a home equity line of credit can be powerful tools, but there are times when it makes more sense to resist the urge to tap into home equity. Before making a final decision, be an informed consumer and understand the consequences to your financial planning. Use this checklist to determine when it might be best to avoid or delay tapping the equity in your home.

1. You live in an area with stagnating or depreciating home values. While areas of the nation have experienced rapid appreciation over the past several years, real estate markets are beginning to cool off and still others never really took off. Remember, real estate is local and not every market grows at the same pace. Even at the height of the real estate boom, some real estate markets experienced very little growth or even a loss of value.

According to the most recent data published by the U.S. Census, there are three areas actually slated to lose people even while the rest of the nation shows an increase in population. These include:

1. Washington DC
2. North Dakota
3. West Virginia

2. You intend to sell your home. Even if you have equity in your home, be careful before taking out a home equity loan or HELOC if you intend to sell your home in the near future. Transactions costs including closing costs, real estate fees and other expenses can add to the price of the home and make your home appear less affordable.

3. You intend to buy another home or obtain financing in the near future. A HELOC or equity loan will increase your debt-to-income ratio and could affect your ability to obtain new financing.

4. Your personal or financial situation is not stable. If your income, job situation or other personal life events are subject to change for the worse, then think twice before taking on more debt.

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