Home Equity Loans

Tapping into your home's equity

The equity in your home can be a valuable source of cash.

* Read this section if you have equity in your home - and you are interested in borrowing additional money.

Convenience and tax-deductible interest make tapping the equity in your home rather appealing. Just be careful that you don’t take a casual view about draining the equity in your home-- it could jeopardize your most important asset.

If you fail to make the loan payments, you could ultimately lose your home in a foreclosure.

Let’s proceed by discussing the different ways you can take money out of your home.

Home-Equity Loans

Home-equity loans, sometimes referred to as second mortgages, involve borrowing money and making principal and interest payments over a specified period of time. Here are some features of home-equity loans:

• Your repayment period can vary. However, lenders will generally not allow a repayment period of more than 20 years.
• You can generally borrow up to 90 percent of the current appraised value of your home, minus your outstanding mortgage balance.

HOT TIP!: You may be able to borrow to a higher percentage of the current appraised value of your home, minus the outstanding mortgage balance, if you can prove that you will be making improvements to the home that will increase its value.

• Interest rates are generally higher than on first mortgage loans.
• Lenders usually offer a choice between fixed-rate and adjustable-rate loans.

Home-Equity Line Of Credit

Another way to tap the equity in your home is with a home-equity line of credit. Instead of borrowing a fixed amount of money at one time, you can establish a line of credit against the equity in your home and draw on the money as you need it. The lender will set a limit on the total amount you can borrow and will issue you checks. It’s almost like a checking account, except you have to pay back the money! Following are some features of a home-equity credit line.

• The maximum credit line is typically up to 90 percent of the current appraised value of your home, minus your outstanding mortgage balance.
• Interest is usually a variable or adjustable rate that can vary as often as monthly.

CAUTION!: With most lines of credit as well as some equity loans, you will receive a variable interest rate. When evaluating these loans, make sure that you consider the worst possible scenario. In other words, be sure that you can handle higher monthly payments during a time of rising interest rates. Find out from your lender what the ceiling is. This is the maximum interest rate they can charge on your home-equity loan. Some can range as high as 16%-18% or even higher depending on where you live.

• You only pay interest on what you borrow, not on the entire line of credit.
• Lenders typically require a minimum monthly payment on any outstanding loan amount.
• Most home-equity credit lines are divided into two periods; a draw period and a payback period. A draw period -- the period of time you are able to draw from the credit line -- can last up to twenty years. The payback period is the period of time you have to pay back the outstanding balance. It usually ranges from ten to twenty years.

Loan Or Line Of Credit?

At first glance, it seems that a line of credit is the best way to go. It offers you flexibility-- you don’t have to saddle yourself with debt that you may not have a use for right away. You can draw down as you need the money and pay back accordingly. But, avoid the temptation to use your home-equity line as a source of ready cash for unnecessary spending. If you can’t control your spending, don’t take out a home-equity line.

Only you know yourself and your habits. We can’t stress enough that it’s dangerous to frivolously tap the equity in your home. After all, your home is likely the most valuable asset you own.

There is yet another alternative to tapping the equity in your home. Refinancing may allow you the opportunity not only to save money, but to borrow more of it.

Refinancing As A Source Of Funds

If current interest rates are lower than the rate on your mortgage loan, it may make sense for you to refinance as a way of tapping equity. You can borrow money in connection with a refinance when you have sufficient equity in your home. To find out if refinancing suits your situation, go through the following steps.

• Read the section titled "Refinancing Your Mortgage" first to get familiar with refinancing.
• In the section titled "Refinancing Your Mortgage" you will be able to see if refinancing makes financial sense in your situation.
• If you decide to refinance, the next step is to determine the maximum amount of additional cash that is available to take out. Read the section entitled "Appraisals", to get an idea of the dollar amount.

Reverse Mortgages*

* This section applies if you are at least age 62.

Probably the main reason that few elderly homeowners have taken advantage of reverse mortgages is that they have no idea what they are or that they even exist. Much like a home-equity line of credit, a reverse mortgage applies the same concept, but the money is not required to be paid back until the home is sold. This option allows cash-strapped elderly homeowners the opportunity to use some or all of the equity in their homes while they are alive. By doing this, they are able to live more comfortably and independently. Both government and private programs exist. Generally to qualify --

• You must be at least age 62.
• If you’re married, your spouse must also be at least age 62.
• You owe very little or nothing on your home.
• Applicants must agree to accept mortgage counseling from a federally approved counselor.

Once the reverse mortgage is in place, there are several different ways to tap into the money.

• Option #1: A line of credit is created and the funds can be drawn upon as needed.
• Option #2: A monthly payment is received by the borrower over a certain number of years.
• Option #3: A monthly payment is received by the borrower as long as the borrower occupies the home.

HOT TIP!: Whichever reverse mortgage option you choose, you can change options if your circumstances should change.

After the borrower moves or dies, the home is sold and the accumulated debt plus interest, and any other closing fees come due and are paid from the sale of the home.

In a nutshell, elderly homeowners who don’t have much of a retirement fund can live off the equity in their home while continuing to live in the home.

HOT TIP!: Contact the Federal National Mortgage Association for information on reverse mortgages and a list of FHA-insured lenders. You can obtain the phone number from 1-800 directory assistance.