Mortgage Equity Loan

By lctodd1947

Home Equity Line of Credit

This type of mortgage loan, Home Equity Line of Credit is also called HELOC and you may see it interchangeably. From part of 2002-2004 I was in originations at a Bank mortgage department and we had promotions gallore trying to promote these HELOC loans. At that time everybody was giving out 100% financing, meaning that if you currently had an 80% first mortgage you could get a 20% HELOC, if you had a 90% first mortgage, you could get a 10% second and do whatever you wanted to with it. It is my understanding that you can still obtain up to 100% financing with a HELOC after you have closed your loan (if your qualify). Since I am out of the market for the most part I am giving you just what I know. I know some HELOC customers may have had some grief because of this added loan.

Let me explain how these work, just in case you do not know already. To get one of these loans you must already own a home and have some equity in your home. You cannot obtain a home equity loan on an investment property because it is not owner occupied. If you just bought your home and only paid 5% down, you may not get a HELOC and my advice is not to anyway. It is pushing your LTV to close for comfort. If you paid 10 to 20% down, then you have more equity and the possibility exist. For those fortunate people who have Loan To Values less than 80%...great planning...take out some of your equity (if you need to) and go with it. The reason I say may, is because these loans are usually opened on the Bank side, not on the mortgage side, although your mortgage professional can usually help you if they work in the Bank where you got your first mortgage.

Normally with a home equity loan, which we call HELOC, it is a line of credit collateralized by your home. It is in Second lien position to your first mortgage. It is a revolving credit line and does not have a fixed payment method. The rate of interest called the APR on HELOC's flucuates with the Banks rate of lending which is based on the Wall Street Journals prime rate. These Bank rates are not the same at each bank..they may vary. So you shop for a HELOC rate just like you do your first mortgage rate. With these loans you are allowed to pay the "interest only" payment for so many years before it is amortized to pay out the loan. Meaning that you can pay interest for 5 years and then your payment is amortized over the remaining term of the loan of 10 year, if you had a 15 year term HELOC. There are also terms of 10 years with 3 years of Interest only payments. There are 5 year terms and your term will depend upon the amount of money you are borrowing and other factors. You are allowed to pay a fixed payment if you choose and the Lender can give you the fully amortized payment so that you can pay off the loan quicker and in my point of view, that is the best alternative to paying back you home equity loan.

Let me tell you my thoughts and experience with these Home Equity Lines of Credit loans. If you have a 80% first mortgage and you want to borrow another up to 20% of your equity to pay off credit cards and other bills you have or buy a car or anything you need to do, you can. That is if your appraisal comes in at the same value or higher than what it was when you purchased your home. There are also credit guidelines you have to meet but the documentation required is not extensive. Your credit will be pulled and you may have to furnish income. There will be a new appraisal. Bank guidelines may vary for loan to values.

The downside of a HELOC to me is this: if you only pay the interest portion for the first 5 years of the loan, your fully amortized payment is going to be much higher for the remaining term. This applies for any term you may have. You have to be sure you can handle these larger payments if you pay the interest only payment initially. What a lot of people have done of late or shall I say tied to do since there has been so many problems with the loss of jobs and income; they have come back and wanted to refinance their first mortgage with the 2nd mortgage (HELOC) included and found with the re-appraised value did not support the loan amount needed to payoff the first and the second to make one first mortgage and they could not accomplish what they needed to do. Value have declined all across America so that has become a problem with trying to come back and get rid of the 2nd mortgage payments.

I have stated this before and I will say it again. You cannot borrow your way out of debt. When you get a 2nd mortgage (HELOC) and payoff a lot of credit card debt, car loans and the like, you could be setting yourself up for failure. If you have the equity and your job is stable and you are not going to use your credit cards anymore..and the value is there, this may be the route for you to stablise your financial position.

During the last few years, some of this disaster came about because a lot of applicants, at the Banks offer, obtained a HELOC at closing. They used these fund and now are coming back to refinance and as I stated the value is not there in some instances and then they are stuck with two payments.

My advice is to be careful when it comes to borrowing againt your home and adding debt to debt when you already have a 30 years mortgage. Just advice..you do not have to think like I do. At any rate, I hope you found this informative and good luck if you decide to go forward with a HELOC loan.