Home Equity Loans and Lines of Credit

If you are thinking of doing some remodeling work on your home or if you are looking for some way to pay for your child's college education, you may have been considering using your home mortgage amortization - the difference between the price you could get on the sale of your house and what you still owe on your mortgage - as a way to cover costs.

Financing on mortgage amortization can be established as a loan or as a line of credit. With a home equity loan, the lender advances the entire loan amount to you, while a home equity line of credit provides you with a source of funds that you can draw on as you need them.

When considering a home equity loan or line of credit, shop around and compare plans offered by banks, savings and loan institutions, credit unions, and mortgage companies. Searching and comparing different options can help you get the best deal.

Remember that your home is the asset that guarantees the amount you borrow through a home equity loan or line of credit. If you don't pay your debt, the lender may force you to sell your home to collect the debt.

1. Home Equity Loans.
2. Home equity lines of credit.
3. Three Day Cancellation Rule.
4. Harmful Practices of Certain Home Equity Loans and Credits

Home Equity Loans

A home equity loan is a loan for a fixed amount of money that is secured by your home. You repay the loan in equal monthly payments over a fixed period of time, in the same way that you pay your original mortgage. If you fail to repay the loan as required, your lender can foreclose on your home.

Usually, the loan amount is limited to 85 percent of the mortgage amortization on your home. The actual loan amount also depends on your income, your credit history, and the market value of your home.

Check with your friends and family to see if they can recommend trustworthy lenders. Then find out and compare the terms. Talk to banks, savings and loans, credit unions, mortgage companies, and mortgage brokers or agents. But know that brokers do not lend money; they only help to process the loans.

Ask all lenders to explain the loan plans available to you. If you don't understand some of the terms and conditions of the loan, ask. What you don't understand may mean that you will pay higher costs. It is not enough to know how much you will pay per month or what the interest rate percentage is. The annual percentage rate (APR) of a home equity loan takes into account financing points and charges. Pay particular attention to fees, including loan application or processing fee, origination or underwriting fee, lender or financing fee, appraisal fee, document preparation and filing fees, and broker fees; These fees can be quoted as points, origination fees, or as an addition to the interest rate. If points and other fees are added to your loan amount, you will pay more to finance them.

Request your score or credit score. Credit scoring is a system that credit grantors use to determine whether or not they will grant you credit. This system collects personal data and credit history of your credit application and your credit report - for example, your bill payment history, the number and type of accounts you have, if you have payment arrears, if you have been subject to collection actions, if you have outstanding debts, and the age of your accounts. Credit grantors compare this information with the credit behavior of other people with profiles similar to yours. The credit scoring system assigns points to each factor that helps predict the likelihood that a person will repay a debt. The total number of points - your score or credit rating - is used to predict your ability to afford a loan, in other words, what is the level of probability that you will repay the loan and make your payments on the established dates. For more information on credit scores, read How does a credit score affect the price of credit and insurance?

Negotiate with more than one provider. Don't be afraid to create competition between lenders and brokers by telling them that you are looking for the most convenient deal. Ask each lender to lower your points, fees, or interest rate. And ask them to match - or improve - the terms and conditions of the other providers.

Before signing, carefully read the closing documents of the loan transaction. If the loan is not what you expected or wanted, do not sign it. Negotiate to have the changes you want made or walk away. Generally, you also have the right to cancel the deal for any reason - and without penalty - within three days from the date you sign the loan papers. For more information, read the Three-Day Cancellation Rule section.

Home equity lines of credit

A home equity line of credit - also known as a HELOC (acronym for Home Equity Lines of Credit) - is a revolving line of credit that looks a lot like a credit card. You can borrow the amount you need, whenever you need it, by writing a check or using a credit card linked to the account. You cannot exceed the credit limit amount. Because it is a line of credit, your payments are based only on the amount you borrow and not on the total amount available. Home equity lines of credit also give you certain tax advantages that some other loans don't. For details, consult an accountant or tax advisor.

As with home equity loans, to take out a home equity line of credit or HELOC you must put your home as collateral for the loan. If you are late or defaulted on your payments, you can put your home at risk. If you take out a loan with a large balloon payment - a lump sum that generally must be paid at the end of the loan - you could be forced to borrow more money to pay off that debt; Or if you don't qualify for a refinance, you could put your home at risk. And in most plans, if you sell your home, you will be required to pay off your line of credit immediately.

Home Equity Lines of Credit FAQs

Lenders offer home equity lines of credit in a number of ways. Not all loan plans fit every homeowner's situation. Connect with multiple lenders, compare available options, and select the home equity line of credit that best meets your needs.

¿How Much Money Can I Borrow With A Home Equity Line Of Credit?

Depending on your creditworthiness and the amount of your outstanding debts, you can borrow up to 85% of the appraised value of your home less the amount you owe on your first mortgage. Ask the lender if there are any minimum requirements for withdrawals at the time of opening your account, and if there are any minimum or maximum requirements for the amount you can withdraw after opening your account. Also ask how you can spend money on your line of credit - with checks, credit card, or both.

You should find out if your home equity plan establishes a fixed period of time - a withdrawal period - to withdraw money from your account. Once the withdrawal or withdrawal period is over, you can renew your line of credit. If you are not allowed to renew it, you will not be able to borrow any more funds. In some plans, you may have to pay the outstanding balance. In others, they may allow you to repay the balance over a fixed period of time.

¿What is the interest rate?

Unlike a home equity loan, the APR for a home equity line of credit does not take into account finance points or fees. The APR for home equity lines of credit is based on interest only.

Ask about the type of interest rates available for your home equity line of credit plan. Most home equity lines of credit have variable interest rates. Monthly payments for variable rate plans may be lower at first, but for the remainder of the repayment period, the amount of the installments can change - and it can go up. If the lender has plans with fixed interest rates, the rates will likely be slightly higher than the variable rates initially, but the monthly payments will be the same throughout the term of the credit line.

If you are considering a variable rate plan, find out the terms and compare them. Check what the periodic cap is - the applicable limit every time there is an interest rate change. Also look at the cap for the full term — the cap on interest rate changes over the term of the loan. To determine how much interest rates will go up or down, lenders use an index, for example the prime rate, also known as the prime rate. Ask the lender which index it uses to determine the variations and what is the frequency of the changes. Also check the margin - an amount added to the index that determines the applicable interest. Also, ask if they will allow you to convert your variable rate loan to a fixed rate loan later.

Lenders sometimes offer a discounted interest rate for a limited time - an unusually low rate that applies only for an introductory period, such as six months. During this time, your monthly payments are also lower. But when the introductory period ends, your rate (and your payments) increase to the true market level (the index plus the margin). Ask if the rate they offer you is a “discounted” rate, and if so, find out how the rate will be determined from the moment the discount period ends and also ask how much more you will have to pay monthly thereafter. 

¿What are the initial transaction closing costs?

When you take out a home equity line of credit, you pay many of the same expenses you paid when you financed your original mortgage. These include: application fees, title search or study, appraisal and attorney's fees, and points (a percentage of the amount you borrow). All of these expenses can add significantly to the cost of your loan, especially if you end up borrowing a small amount from your line of credit. Try to negotiate with the lenders to see if they are willing to pay for some of these expenses.

¿What are ongoing costs?

In addition to the initial closing costs, some lenders charge fees for the entire term of the loan. There may be an annual membership or participation fee, which you must pay if you use the account, and / or a transaction fee that applies each time you borrow money. These fees increase the overall cost of your loan.

¿What are the repayment terms during the loan?

If you take out a variable rate line of credit, the amount of your monthly payments may change as you repay the loan, even if you don't borrow more money from your account. Find out how often the amount of your payments can vary and by how much they can change. Ask if he is repaying the principal amount of the loan and the interest or if he is only paying the interest. Even if you are paying a portion of the principal amount of the loan, ask if your monthly payments will cover the full amount of the loan or if at the end of the loan period you will owe an additional payment on the principal amount. You can also ask about the penalties or fines applicable to late payments and under what conditions the lender may consider you in default and demand full and immediate payment of your loan.

¿What are the payment terms at the end of the loan?

Ask if you may be left with a large balloon payment at the end of your loan. If that possibility exists and you are not sure if you can afford the balloon payment, you may want to negotiate your repayment terms. When you take the loan, ask about the conditions to renew the plan or to refinance the unpaid balance. If necessary, consider requesting the agreement from your lender to refinance the balance owed at the end of the loan or to extend the repayment period, remember that you must do it well in advance and in writing.

¿What are the safeguards built into the loan?

One of your best protections is the Federal Truth in Loan Operations Act. Lenders are required by law to tell you the terms and costs of the loan when they submit the loan application. Lenders must declare the APR and payment terms and must inform you of the applicable charges to open or use the account, such as appraisal, credit report, or attorney fees. If the loan has a variable rate, the lenders must also inform you and provide you with a brochure describing the general characteristics of the loan plans on your mortgage amortization.

The Truthfulness in Loan Operations Act also protects you from changes in the terms of the account (except for the variable rate) prior to the opening of the plan. If you decide not to accept the plan due to a change in the terms, all charges that you have paid must be returned to you.

Once the loan plan is opened on your mortgage amortization, and if you pay as agreed, the lender generally cannot terminate your plan, accelerate the payment of your outstanding balance, nor can it change the terms of your account. . If the contract allows it, the lender can suspend the credit advances on your account during any period in which the interest rates exceed the maximum limit established in your loan agreement.

Before signing, read the documents of the loan closing transaction carefully. If the home equity line of credit isn't what you expected or wanted, don't sign. Negotiate to have the changes you want made or walk away. And like a home equity loan, you also generally have the right to cancel the deal for any reason - and without penalty - within three days from the date you sign the papers. of the loan. For more information, read the Three-Day Cancellation Rule section.

Three Day Cancellation Rule

Federal law gives you three days to reconsider a signed credit agreement and cancel the deal without penalty or penalty. You can cancel for any reason but only if you are using your primary residence as collateral - it can be a house, a condominium, a mobile home or a boat that you use as a home - you cannot avail yourself of this right if the collateral is a vacation home or a secondary residence.

If you exercise this right of cancellation, you have until midnight of the third business day to cancel the credit transaction. The first day starts running after the following three events occur:

The signing of the credit agreement.

The receipt of the information form required by the Law of Truthfulness in Loan Operations that contains key information about the credit agreement, including the APR rate, financial charge, and payment schedule.

The receipt of two copies of the notice required by the Law of Truthfulness in Loan Operations explaining your right of cancellation.

For cancellation purposes, business days include Saturdays but do not include Sundays and public holidays. For example, if the events listed above happen on a Friday, you have time to cancel until the following Tuesday at midnight.

During this waiting period, no activity related to the contract can take place. The lender cannot deliver the loan money to you. If you borrowed to do remodeling work on your home, the contractor cannot deliver any construction materials to you, nor can the contractor begin the work.

If you decide to cancel

If you decide to cancel, you must inform the lender in writing. You cannot cancel over the phone or in a personal conversation with the provider. You must submit your cancellation notice by mail, electronically or by hand before midnight of the third business day.

If you cancel the contract, the lender's property or pledge is also canceled, and you are not responsible for paying any amount, including the finance charge. The lender has a period of 20 days to return all the money or assets that you would have given as payment as part of the transaction and must release any property or pledge rights on your home. In the event that you have received money or assets from the lender, you can keep them until the lender proves that your home is no longer listed as collateral and returns the money that you would have paid. Only then, should you offer the lender a refund of the money or else. If the lender does not claim the money or property within 20 days, you can keep it.

If you have a bona fide personal financial emergency - for example, if your home is damaged by a storm or other natural disaster - you may waive your right to cancel and waive the three-day period. To waive this right, you must provide the provider with a written statement describing the emergency and stating that you waive your right to cancel. This statement must be dated and signed by you and any other co-owner of the home.

The Federal Three-Day Cancellation Rule does not apply in every situation where you use your home as collateral for the loan. The exceptions are:

When you apply for a loan to buy or build your primary residence.

When you refinance your loan with the same lender who holds your loan and you do not borrow additional funds.

When the loan lender is a state agency.

In these situations, you may have other cancellation rights established by state or local law.

Harmful Practices of Certain Home Equity Loans and Credits

If you agree to take out a high-cost home equity loan from unscrupulous lenders, you could lose your home and your money. Some lenders target elderly, low-income, or credit-troubled homeowners - and try to take advantage of them using deceptive, unfair, or illegal practices. Be careful and keep an eye out for the following practices:

1. Repeat loan: The lender encourages you to repeatedly refinance the loan, and often to borrow more money. Each time you refinance, you pay additional fees and interest points and increase your debt.
2. Insurance package: The lender adds credit insurance or other insurance products that may not be necessary for your loan.
3. Jack-in-the-box: The lender offers you a set of loan terms when you request it, and then, when you are willing to sign the papers to complete the transaction, pressures you to accept higher fees.
4. Disposal of your mortgage amortization: The lender grants you a loan based on the mortgage amortization of your home, and not on your ability to repay. If you can't make your payments, you could end up losing your home.
5. Non-traditional products: While you are inquiring about a home equity loan, the lender may offer you non-traditional products:For example, lenders may offer loans with a minimum payment that does not cover the principal amount and interest owed. This leads to an increase in your loan balance, and in the long run, in the amount of your monthly payments. Several of these loans have variable interest rates, and if the interest rate increases, the amount of your monthly payment can also increase.They can also offer you loans with low monthly payments, but a very large balloon payment at the end of the loan term. If you cannot meet the balloon payment or cannot refinance, you will face foreclosure and could lose your home.
6. Home Loan Administration Abuses: The lender charges you incorrect charges, such as late fees that are not allowed in the mortgage contract or by law, or charges you with insurance charges even if you already have homeowners insurance. The lender does not provide you with a complete and accurate account summary, nor does it detail the amounts of your payments, all of which makes it virtually impossible for you to determine how much you paid and how much you owe; therefore, you may pay more than you owe.
7. The “home remodel” loan: You receive a call or visit from a contractor who offers to install a new roof or remodel your kitchen at a price that seems reasonable. You tell him that you are interested, but that you don't have enough money to pay for the job. The contractor tells you there is no problem - he can get you financing from a known lender. You accept the project and the contractor begins the work. At one point, after the contractor starts working on your home, they ask him to sign a bunch of papers. The papers may be incomplete or the lender may rush you to sign before giving you time to read them. The contractor threatens him by saying that if he doesn't sign he will leave the job unfinished. You sign the papers. Later, you realize that the papers you signed are for a home equity loan. Interest rate, points, and fees seem too high to you. To make matters worse, the work they did on your home is incomplete or poorly done, and the contractor, who may have already billed the lender for the work, has little interest in completing the work as you want it to.

Some of these practices are contrary to the federal credit laws that establish the informational requirements on the terms of the loans; that punish discrimination based on age, gender, marital status, nationality and that regulate debt collection efforts. You may have any additional rights established by state law that allow you to take legal action against the provider.