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Home Equity Loan

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In this article:
  • Examine what a Home Equity Loan (HEL) is.
  • Review how a HEL differs from a Home Equity Line of Credit (HELOC).
  • Understand that fewer lenders offer HELs than offered them in the past.

Everything You Need for Your Home Equity Loan

What is a HEL?

A home equity loan (HEL) is often referred to as a second mortgage. A home equity loan is money you borrow that is secured by your ownership stake in your home.  Home equity loans are similar, in some ways, to standard primary mortgage loans. Both have fixed principal amounts disbursed when the loan closes, pre-set payment schedules, and either adjustable or fixed interest rates.

Home equity loans also share similarities with Home Equity Lines of Credit (HELOCs). Both HELs and HELOCs are loans that sit in a junior lien position to your primary mortgage. You use both to finance expenditures and purchases of a personal nature, such as debt consolidation,  medical expenses, education costs, home improvement projects,  and large-ticket items.

However, you should also be aware how home equity loans differ from standard mortgages, including refinance mortgages. A HEL has higher costs than a primary mortgage. The lender takes on a higher risk, because of its junior lien position and the fact that HELs have a higher rate of default.  The lender charges you more to offset its risk. You may find it hard to take out a HEL from anyone other than your primary mortgage lender. A 'stand alone' second mortgage,  a second mortgage taken on its own and not in conjunction with a first mortgage, is offered by far fewer lenders than was the case a few years ago .

HELs are different than HELOCs, because HELs have a fixed loan amount and payment schedule, whereas HELOCs are revolving lines of credit, only paid on as you use the credit line. Additionally, HELs require principal and interest for the life of the loan, while HELOCs allow a period of interest only payments. HELs usually are available with fixed interest rates, where HELOCs usually come with variable interest rates.

When to take a HEL

HELs are ideal for one-time purchases or use when you know how much money is required, such as debt consolidation or a home-improvement project with a fixed budget. Borrowing form your home equity may be the only way you can finance these events, as unsecured loans are now very difficult to obtain and  if available  are only available at very high interest.

The primary disadvantage of home equity loans is that if cannot make your payments, you put your home at risk for foreclosure. If you borrow a lot of the equity from your home and the value of your home drops, you may not be able to sell your home and pay back all the money you owe on it. When you have two loans, the total debt is referred to as the CLTV (combined loan-to-value).  90% CLTV is the most liberal CLTV maximum available for a HEL. Some lenders cap CLTV at 80%, some at 85%. The state you live in can also restrict the CLTV maximum and different states have different CLTV caps. Condominiums have stricter borrowing caps than single-family residences.

Qualifying for a HEL is harder than it used to be. Lenders have stiffened their requirements, in terms of maximum amounts they will lend and the credit worthiness that you must demonstrate.

Summary 

If you're looking for a home equity loan, use Bills.com's Savings Center to find the best deal. When interest rates are low, you should look at all your borrowing options, including refinancing your primary mortgage, or taking out a second mortgage. When you understand what kind of loan best fits your needs, you increase your chances of finding the right loan.

 

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  • GG
    Gizeh,
    Minneapolis, MN,
    Feb, 2013
    When we refinanced our house in 2004 we did what our mortgage banker recommended 80/20 Mortgage/He Term with M&I Bank. Unfortunately, I lost my job in 2006 and were late on our mortgage (60 days). As soon as we were able to catch up we paid all the money owed and were back on track. That's we received a letter saying that my mortgage was going to be transferred to BSI Financial. Now the HE Term matured on February 1st 2013 and we are finding these fun facts:
    1. M&I, now BMO Harris, is showing that my mortgage was Charged Off but I have letters saying it was "transferred".
    2. BSI has never reported even one payment to the credit bureaus, making it harder to improve our credit score. In another words, we don't show a mortgage at all in our credit history. When I called BSI they said that my "mortgage" is owned by an investor, what does that mean?
    3. I've been working with BMO Harris since January 15th (when they submitted my renewal application) to renew my HE Term and received disclosures shortly after, I provided with everything they asked and we are still waiting for an answer after 45 days so I contacted them and they said that even when we've been working for a month and a half, tomorrow they are going to report the matured note as 30 days past due. But previously I was told by a branch banker that once I start the application they will make sure that they can put a note saying that they were working with the client and didn't have to worry about the late being reported to the bureaus.

    With the "charged off" instead of the transfer, BSI not reporting to credit bureaus, and now this, my credit score will never recover. Is there anything I can do? Please help, I am having a panic attacks over this. Thank you for any advice you can give me.

    • BA
      Bill,
      Mar, 2013
      Consult with a lawyer who has consumer law or mortgage negotiation experience to assist you in your negotiations with your two lenders.

      In the meantime, move up the chain of command at BSI Financial Services regarding it not reporting your credit history to the major consumer credit reporting agencies (CRAs). In several locations on BSI's Web site, it insists it reports information about the loans it services to the CRAs. Make PDF copies or screen shots of its Web pages and PDF copies or screen shots of your credit reports to show that BSI is not following through on its promises to report your information.

      Ultimately, every mortgage is owned by an investor of some kind, be it a private individual, a pension fund, foreign government, or the US government. Your loan may be owned by a private individual, but really, that's just speculation on my part. What BSI may be telling you is your loan is not a Fannie Mae or Freddie Mac loan, which knocks you out of eligibility for HARP.

      Consider submitting a complaint to the CFPB about your situation, the apparent lack of good-faith bargaining on behalf of BMO Harris, and BSI's failure to submit your timely mortgage payments to the CRAs, and the consequences it has had on your credit score. Take your time in drafting your complaint, and include accounts numbers, relevant dates, and names of people you have spoken to. The more facts you can provide, the better the CFPB will understand your issue. It is by no means certain that the CFPB will be able to assist you, but at least you will give yourself a chance to be heard. As previously mentioned, consult with a lawyer about your situation as well.
  • MP
    Michelle,
    Dec, 2011
    I live in Michigan and have a mortgage, up to date. I have a Heloc with BOA for $35,000 which the loan is due April 2012. It was an interest only loan. I've talked to them about modifying my loan but they won't talk to me until January for some reason. I need atleast 5 years on this to pay them in full. I've never been late on any payments and my credit is above 750. Do you find they will usually help modify loans, what are my chances of offering them an amount less than my loan for payoff?
    • BA
      Bill,
      Dec, 2011
      I wish I had a crystal ball I could look into and tell you whether your loan servicer will modify one or both of your home loans. Alas, I do not. I doubt that even if you got the president of your loan servicer on the phone, he or she would not be able to answer that for you honestly. We are years into this crisis and the loan servicers are still not processing modifications efficiently. My best advice is for you to apply, keep copies of everything you send the loan servicers, and follow all of its instructions completely. Incomplete applications seem to get lost more often than complete applications.
  • BM
    Beth,
    Chino Hills, CA,
    Nov, 2011
    My son, had a home equity on a property that was not in his name. The property got foreclosed so now BOA sued him and won by default. I am afraid they will garnish his wage for loan that he only got part of it and who ever facilitated it got most of the money. He is also about to settle a debt on a credit card. I had a feeling my son needs to file bankruptcy because of this two case. the credit card also sued him and about to have a judgement when I talk to them and about to agree to settle.
    • BA
      Bill,
      Nov, 2011
      You are correct in assuming that the BOA will pursue the deficiency balance and seek a court judgment, which can lead to wage garnishments. Your son should not settle his credit card debts without looking at the bigger picture.

      There are different options available when dealing with credit card debt, including bankruptcy. Read bills.com article about comparing debt options and seeking debt relief help.
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