One of the biggest rewards of homeownership is the ability to build up equity. Equity can be tapped by obtaining home equity loans or lines of credit. These are low-cost funds relative to other sources of credit and are great refinancing tools.<\/p>\n
Loans to access equity in a property are different than a mortgage to purchase a property. The traditional home mortgage sits in first position as a lien. The lender holding the first loan has first recourse in the event of nonpayment.<\/p>\n
When the property sells, proceeds will first go to paying the loan in primary position. Any remaining funds will be applied to a second lien.<\/p>\n
Home equity loans and lines of credit will take second position behind the original purchase mortgage. Second-position loans present more risk to the lender for payment by the borrower and for full payoff in the event of default. The higher risk means a higher interest rate on the second loan than the first.<\/p>\n
The home equity loan is similar to the first loan because it will also have a beginning and ending date and will be paid off at the end of the term. Monthly payments are fixed for the duration of the loan.<\/p>\n
A home equity loan can be a useful tool to optimize the interest rate and loan fees when a buyer has only 10% to put down. For example, if a buyer is purchasing a $100,000 home with a 10% or $10,000 down payment, the buyer will have to pay a higher interest rate for the loan and pay for mortgage insurance because the equity position would be less than 20%.<\/p>\n
To avoid these extra loan costs, a 10% home equity loan could be piggybacked on top of a first loan, which would now be $80,000.<\/p>\n
The final structure of the purchase would be an 80\/10\/10 loan\u2013a $10,000 down payment, a $10,000 home equity loan and an $80,000 first loan. Since the lender of the primary loan now has less risk at 80%, the interest rate will be more competitive, and mortgage insurance is not required.<\/p>\n
The primary difference between the home equity loan and the line of credit is that the line of credit yields access to equity, much like a credit card. The balance of the loan and the interest rate can change monthly. Interest rates on the line of credit are tied to an economic index that fluctuates.<\/p>\n
The borrower can access the entire loan amount at one time or use the available funds in smaller amounts. As the loan is paid down, the line of credit becomes a revolving source of funds.<\/p>\n
The home equity line of credit (HELOC) does not charge interest until funds are used, making these loans a nice source of emergency funds. Another pro of the HELOC is that loan costs are typically less than the fees for a home equity loan.<\/p>\n
Having a good understanding of HELOCs and home equity loans helps you open more doors for your buyers. Please call me, and I will further explain these great lending tools to help grow your business.<\/p>\n
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