There might be money hidden in your home. It’s not inside a rusted chest in the attic or buried in your backyard. Rather, it’s in the equity -- what your home might sell for today, less what you owe. A home equity loan or line of credit can be useful for paying off high-interest credit cards, or for home improvements and repairs. However, the risk is that if you are unable to make timely payments, you could lose your home.
Home Equity Loan
A home equity loan is for a fixed amount of money, repaid over a specified period of time, say $50,000 for 10 years. Such loans are commonly used for home improvement projects. These loans are repaid with monthly payments over a fixed term, just as with a conventional mortgage. The interest rate you pay can either be fixed, or vary over time -- known as an adjustable-rate home equity loan. If your rate will vary, ask the lender your loan payment will be affected if rates go up -- and find out if it will be reduced when interest rates fall.
Home Equity Line of Credit
A home equity line of credit allows you to tap the equity in your home by writing a check or using a credit card linked to the account. You can borrow at your convenience for any amount, up to your credit limit. Payments are due only on your outstanding balance, not on the full amount available. Just as with the home equity loan, the interest rate can be fixed or adjustable. The interest paid on either a home equity loan or line of credit are generally tax deductible, with certain qualifications. A tax adviser can give you the complete details.
Finding the Best Deal
Ask friends and family for a referral to their favorite bank or credit union, but don’t limit yourself to one potential lender. Shop savings and loans, mortgage companies and mortgage brokers as well. Though brokers don’t actually lend money, they help arrange loans. Compare the interest rates and fees from each lender and negotiate your best deal.
Be Aware of Fees
It can be difficult to peel back the layers of fees on home equity loans and lines of credit. The annual percentage rate includes fees and finance charges, but you may also see application fees, loan processing charges, origination or underwriting fees, lender or funding fees, an appraisal fee, charges for document preparation and recording fees – even broker fees. No matter what they’re called: points or interest rate add-ons, they cost you money and increase your payment.
Know Your Credit Score
Your credit score will be a principal factor in the qualifying process for a loan or line of credit, and it will help determine how much money you qualify for and your total cost. Many factors contribute to your score, including your payment history, outstanding debt, number of credit accounts and more. Federal law allows you to get a free copy of your credit report from each of the three national credit reporting companies once every 12 months. To obtain your actual credit score -- a rating of your credit worthiness -- you will pay a nominal fee, usually about $8. Complete information can be found at annualcreditreport.com.
The Three-Day Cancellation Rule
After you have navigated the loan process, signed all the paperwork and returned home, you may find that you have changed your mind. Federal law gives you three days to reconsider a signed credit agreement and cancel the loan for any reason, without penalty. This applies only to your principal residence used as collateral — whether it’s a house, condominium, mobile home, or even a house boat — but not to a vacation or second home.
Hal M. Bundrick is a Certified Financial Planner(TM), writer, entrepreneur and former financial consultant and senior investment specialist for two leading Wall Street firms. He has written for trade magazines, newsweeklies, and leading websites including Forbes.com and TheStreet.com.