Information About Home Loans

The short answer is that the maximum amount of money that can be borrowed using a home equity loan is determined by variables such as credit history, income, the appraised value of the house, and other factors.

But before you start shopping around, however, you may want to weigh the positives and negatives of a closed-end home equity loan verses an open-end home equity line of credit (HELOC).

With the closed-end loan the borrower receives a lump sum at the time of the closing and cannot borrow further. They are typically given with a fixed interest rate and structured in a very similar way to a first mortgage. You make a one-time choice on the amount you would like to borrow, close on the loan, and receive a check for the amount you’ve chosen. You will have regular payments structured over a period of years, and upon completion of those payments, your home equity loan will be paid in full. If you decide later that you would like to draw additional funds, you will need to arrange for an additional loan with additional closing costs. However, the closed-end second carries a fixed rate that will never go up and offers a straightforward plan for paying the money back.

A home equity line of credit, also known as an open-end home equity loan, is a revolving credit loan where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due.

Some people find a HELOC advantageous because it offers a line of credit from which you can withdraw money again and again. In many ways, a HELOC is just like a credit card, but the interest you pay is tax-deductible. You will close on a HELOC only one time, but if you decide after a few months that you need to withdraw additional money, you will be able to do so up to the value of the loan. That is to say, if you close on a HELOC for $60,000 and over a period of time pay back $13,000 toward the principal, that $13,000 is available to be drawn again at any time.

You will continue to make payments toward what you owe just as you would on a closed-end loan; however, the full amount of the loan is always available to be drawn on, as long as the amount you owe and the amount you borrow do not exceed the total amount of the original HELOC.

Whether a closed-end loan or a HELOC is right for you is something you, your loan officer, and/or your financial planner must decide. If you are relatively sure that you will need to borrow against your equity only one time in the next several years, a closed-end second offers the fixed rate and regular amortized payment schedule that ensures you know both how much your payment will be and how long it will take you to pay off the loan. This kind of assurance can be particularly useful if you don’t trust yourself to spend wisely, or if you tend to buy impulsively and don’t want the option of drawing out additional funds.

A HELOC can be most useful if you are taking on a project, such as home repair, that has the potential of unforeseen expenses. A HELOC offers you the flexibility to borrow again and again.

Once you and your financial planner have decided on the loan type that best fits your needs, I encourage you go online and visit Bills.com. There you will find our Saving Center where you can apply (for free!) to be matched with our pre-approved lenders. Bills.com also offers information and profiles on specific lenders at http://www.bills.com/lender-profiles/.

Good luck and good saving,

Bill

www.bills.com/