Home Equity Loans
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Home Equity Loan Do's and Don'ts
Can you give some "do's" and "don'ts" of home equity loans? What are some questions that I should ask? Thanks.
A Real Estate Closer's Advice for Home Equity Loans
Having been a real estate closer for 10 years, I do have a few tips that might help you.
I can't stress this enough: Credit Unions, Credit Unions, Credit Unions! Many are easy to join, free and provide excellent benefits. For example, no closing costs and the interest rate being prime plus 1% or so. That means prime published lending rate plus one interest percent. Some credit unions that do have closing costs will usually pay them. The amount of the closing costs becomes the exact amount of your one, two or three year prepayment penalty. Not too shabby!
Do any visual upgrading that you can before you get your mortgage. You should get a better appraisal. I'm not suggesting you re-roof, but a pretty house usually increases the value.
Do use a home equity loan to pay off high credit card balances or even pay off that car! The interest is, of course, tax deductible, and usually much lower than that Visa you've been paying.
I would not suggest getting a Home Equity loan if you don't immediately need the money. Even if you don't draw on the balance, it is still an open mortgage and you have possibly paid unnecessary closing costs.
Don't go to the first lender that you heard good things about. A friend recommended a particular lender to me. But by shopping around, I was able to get a no closing cost loan from someone else, which included a better rate.
Find out if the lender will require title insurance. A lot of Home Equity lenders do not require it, which can save you a few hundred bucks. Not that title insurance is a bad thing, but in this case it insures the lender, not you.
Have your loan approved before you sign any work orders with the contractor if you are using the money for home improvement, such as a pool, adding a room, new roof, fencing, etc. Contractors place what's known as a Commencement Notice (Notice to start work), and it messes up your loan. Get the estimates, get the money FIRST, and then find a contractor.
Questions Learned from Experience with Home Equity Loans
We buy, renovate, and resell houses. We finance it all through home equity loans on the various properties. We've learned to ask these key questions:
- Is it a loan or a credit line? With a Home Equity loan, you get all the money at once, and have to start paying interest on it at once. With a Home Equity credit line, you take only the money you need as you need it. You write checks to get the money, and pay only for what you take. As you repay the balance, your credit line is restored, like a credit card.
- What is the interest rate? Right now we're getting prime + 0%, which is the rate banks pay to each other.
- How often will the interest rate change, and is there an upper limit?
- What costs will be charged at closing? We just got surprised by closing costs of more than $1000 on a $100,000 equity line. Not nearly as much as on a mortgage, but still more than we paid before. Closing costs include attorney fees (you should have the right to choose the attorney), title insurance, and title search.
- Will you have to do an appraisal? This can cost up to $300, and many banks now use public tax records to estimate property value instead of an appraisal.
A word of caution - we buy many foreclosed homes in our business. We've been amazed at how much money banks will lend against a home's supposed equity. Appraisals are often inflated, which means if you sold the house you would owe more than it is worth. Some banks even advertise loans for 125% of a home's value. Don't borrow more than you can comfortably pay back! Just because a bank wants to give you money doesn't mean you should take it. It's too easy to lose your house, ruin your credit record, and end up with nothing. Use good sense!
A Word of Caution About Home Equity Loans
In response to the reader's question on home equity loans, I would offer this advice: Don't borrow more than your home is worth, even if the loan company is offering it. I am a bankruptcy attorney, and I often see people who have taken second or third mortgages on their homes. Then when the reality of those payments hits home, they realize the payments are too high to fit into their budget. The nightmare continues when they realize that they now cannot sell their house to get out from under the payments because they owe more that it will take to pay off the mortgages. We all need to realize that just because some loan person tells us we are qualified to borrow a certain amount, that does not mean we can actually afford to pay it back.