Resources for Home Equity Lines of Credit

Your current lender may be able to offer you more favorable terms on your loan with fewer costs. If they can not, you can apply for a home equity loan or line of credit with any lender you choose. Some lenders only offer second mortgages to clients who have their first mortgage with the lender.

The home that you use as collateral  for your HELOC does not need to be your primary residence, for at least some lenders.

In a Home Equity Loan (HEL), the entire loan amount is disbursed to the borrower when the loan closes.  With a Home Equity Line of Credit, instead of receiving the loan in a lump sum, the borrower receives a revolving line of credit with a a checkbook or debit card to make purchases.

The maximum size of your home equity loan is determined by your CLTV (combined loan to value ratio) and the state in which you live. Most lenders will not go above 85% CLTV. Some states restrict CLTV. For instance, Texas allows a maximum CLTV of 80%.

Your monthly payments are based on the term of your loan, your interest rate, and the type of loan you have. Because most HELOCs allow a period of interest only payments, your monthly payment will depend on how you use your line of credit.  Be sure that you are clear about how much your payments will be and whether or not your loan includes a balloon payment at the end of the term, before you agree to your loan.

It depends on your situation. If you can comfortably meet your mortgage payments and loan payments, then yes, a home equity loan may be a good idea. However, you could lose your house if you fall behind on loan payment where your home is used as a security guarantee.

A freeze is when the lender stops your use of the credit line, preventing you from increasing the balance owed. Freezes have been quite common, as home values have dropped, as lenders seek to reduce their exposure. Lenders can freeze the credit line if they have a reasonable suspicion that you will not repay the loan.

Many home equity loans have a fixed period during which you can borrow money,called the 'draw period.' The draw period can run as long as 10 years.  If your plan does not allow renewals, you will not need to start paying down the principal balance, along with any accrued interest. This is called the 'repayment period.'  Repayment periods can last 10 to 15 years. Each lender can set its own terms, so the draw period and repayment period will vary from lender to lender. Make sure that you know your obligations, before you finalize the loan.

Terms vary from lender to lender. HELOCs usually come with an adjustable interest rate. Make sure that you know how often your interest rate can adjust, how much it can adjust at any one time, and if there are any lifetime caps for how high it can adjust.  Find out how long you are allowed to draw on the equity line and when you are required to begin making principal payments. Also, inquire about late payment fees and the circumstances under which you could be considered default.

In mortgage terminology, application fees are fees the lender charges the borrower when the borrower applies for the loan. These fees may include charges for property appraisal and a credit report. Application fees can often rolled into the loan,  paid when the loan closes. Be wary of a lender that requires you to pay an application fee up-front.

A formal written evaluation supplied by a professional, licensed property value estimator, the appraiser. The appraisal contains an estimate of a property's fair market value. The appraisal is based on the sale price of comparable homes in the area and the property's specific features. Lenders usually require an appraisal, before approving a loan, in order to have an accurate idea of the property's current value. A recent appraisal protects the lender from making a loan for an amount that is greater than the percentage of the home's value that the lender's requirements permit.

The CLTV takes your total principal balances, from all loans against your property, and divides them by the fair market value of your property. For example, a home worth $200,000 with a first mortgage of $120,000 and as second mortgage of $30,000 has a CLTV of 75%.

Regarding a home or property, equity is the difference between the fair market value of the home or property and the outstanding balance(s) on your mortgage(s). Regarding  your vehicle, equity is the difference between the trade-in or market value of your vehicle and the loan payoff amount.

The primary mortgage on a property. In some cases, more than one mortgage is taken out on a property.  In case of borrower default, the first mortgage has priority over any other mortgage or lien, when it comes to collecting proceeds from the sale of the property. Property taxes, however, can get in line ahead of a first mortgage lender.

A type of loan where the interest rate remains the same throughout the duration of the loan.

The draw period is a span of time (usually five to 10 years) during which the borrower may withdraw money from his or her home equity line of credit.

The repayment period is the span of time during which the borrower must pay back the money withdrawn from his her HELOC, which is usually 10 to 20 years.

A reverse mortgage that is insured by the Federal government and backed by the US Department of Housing and Urban Development (HUD).

A HELOC is a form of revolving credit , usually taken as a second mortgage, in which a home serves as collateral. Unlike a credit card, which is another type of revolving credit, at the end of the loan term on the HELOC, usually 10 to 20 years, the borrower has to repay any remaining balance in full.  A HELOC has an expiration date, a maximum limit, and a variable interest rate.

Sometimes called a second mortgage. A lump sum loan with a fixed interest rate and fixed repayment period. The loan borrows against the difference between your remaining first mortgage balance and your home's current market value.

The price paid for borrowing money, aside from any distinct fees the lender charges. Interest rates are usually stated in percentages of the principal amount borrowed and as an annual rate.

The amount you owe on your mortgage divided by the current market value of your home.  The ratio is stated in percentages. For example, a home with a mortgage balance of $80,000 that is worth $100,000 has an LTV of 80%.

One point is equal to 1 percent of the principal amount of a mortgage loan. For example, if a mortgage is $200,000, one point equals $2,000. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages to cover loan origination costs or to provide additional compensation to the lender or broker. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs. Discount points (sometimes called discount fees) are points that the borrower voluntarily chooses to pay in return for a lower interest rate.

Prepayment penalties only apply to borrowers whose loan contained a prepayment penalty clause and who pay off the loan early. Loans are paid off when the borrower refinances a loan, sells the home, or uses a lump sum. The length of time that the prepayment penalty stays in force is specified in the loan documents. Prepayment penalties are usually limited to the first few years of the loan’s term.

The amount of money borrowed or the amount still owed on a loan.

 A second loan that is procured using the same property as security and used to pay off the original loan.

A loan secured against a home that is subordinate to the first mortgage against the home.