The Stark Reality Of Home Equity Lines Of Credit (HELOCs) Today

In the current economic climate many homeowners are finding the going quite tough when it comes to getting approved for a home equity loan or line of credit (HELOC) from many of the major banks and lending institutions. It comes as no surprise that the majority of lenders are tightening their approval requirements and have applied more stringent guidelines for applicants to meet as they run to recover loses and protect assets.

They seem to be concentrating their focus upon the overall trends in the values of houses in different states and as a consequence the number of successful applicants for any kind of home equity product has become much scarcer. As the real estate market continues to feel uncertain the difficulty in being approved for home equity loans looks set to continue. A lot depends on the state in which you are living when it comes to being approved today as success rates are higher in states that have demonstrated more stable housing prices.

The perception in the decrease in available equity loans has come much from the fact that many people were used to the idea that getting $50,000 – $100,000 in home credit was easy, the banks created that climate. Many people however turned their lines of credit loans into bad loans buy using the money to buy temporary life experiences such as holidays or things which would quickly depreciate in value such as boats and sports cars.

When the property bubble burst homeowners were left with vastly reduced amounts of equity in their homes and are now feeling its effects when applying for home equity loans. It is now claimed that as much as 23% of people with mortgages are in negative equity while many others hold less than 20% equity which is the minimum amount most lenders look for.

While many are criticising the banks and lenders for appearing to close their doors to home equity loans some believe that there simply aren’t enough qualified borrowers in the marketplace given today’s housing market and financial climate. Most lenders these days are looking for an 80% loan-to-value maximum.

The Most Important Things For Getting A HELOC (Home Equity Line Of Credit)

Even though the financial landscape is a little bleak at the moment there are still people being approved for lines of credit and home equity plans. Here are some helpful tips to increase your chances of getting a HELOC and remember to also enquire at local real estate agents as they can have some quality information.

1. Leave Big Banks Behind And Focus Instead On Small HELOC Lenders

You’ll probably find that most of the major banks have clamped down pretty hard on issuing any new home equity loans but many of the smaller, local lenders are still willing to grant equity lines of credit. Talk to your local credit union in particular. The requirements (underwriting standards) are indeed stricter and more stringent than before but assuming your financials meet their accepted limits then you stand a good chance of being approved. Some lenders are even requested that two independent appraisals be carried out on your house where in the past only one was required. Expect your lender to take a hard and critical look at the value of your home and your ability to repay a home equity line of credit.

2. Look Seriously At Your Credit Score

It’s always been that homeowners with great credit scores had the best chances of all for getting loan approvals however these days (and when it comes to HELOCs) its become more true than ever. If you can combine a strong credit score with the luck that you live in an area of the country which has escaped the worst of the housing crisis, such as in Texas, then you’ll double your chances of being approved. Remember that home equity loans and credit lines are based squarely upon the value of your property and how robustly its stood up to the recent ill winds of change.

3. Educate Yourself On The Reality Of The Times You Live In

As previously mentioned, having the good fortune to own a home in a state which has weathered the housing storm relatively well, where house prices have remained strong and confident, then your chances of being approved for home equity HELOC are vastly improved. Texas laws actually made it harder for residents to easily extract money from banks against the value of their homes and this is one of the reasons why residents of the state are in a more fortunate position today.

Homeowners in other states including Florida, Nevada and California are in a worse situation. The property market in those states has been severely hit with houses losing value in many sectors across the board. If this situation applies to where you currently own your home then its best to realise from the outset that getting approved for any kind of home equity loan line of credit is going to be extremely difficult even if you have a good credit rating and credit history.

The Difference Between Home Equity Loans (Closed-End Loans) and Lines Of Credit (HELOC)

Let’s look at the kinds of HELOCs available to you, one is called a term loan (also known as a closed-end loan) and the second is called a “line of credit”. You will find that both these loans come under the category of second mortgages because, just as your first mortgage, they are secured by the value of your home as collateral.

Traditional first mortgages have terms which are typically longer (often 25 – 30 years for example) while second home equity loans and lines of credit are for shorter terms of between five to fifteen years.

Home Equity Loan (Term Loan)

The lender will access the value of your home through an approved surveyor offering home inspection services and how much of its equity you would actually own if the house were sold and your first mortgage repaid in full. The amount you can borrow would depend upon this basic equation along with your earnings and other factors. Upon approval you would be paid a lump sum and repay the loan in fixed amounts each month subject to a fixed interest rate. HELs will usually qualify you for a tax deduction on the interest repayments.

Home Equity Line of Credit (Home Equity Credit Line)

This loan is often abbreviated to HELOC and functions in quite a similar way to a normal credit card. You are approved a certain credit limit, let’s say $70,000, which you can withdraw over the lifetime of the loan – perhaps 10 years. You are free to withdraw the money as and when you need it and much like a credit card – as soon as you pay off the principal borrowed your credit would revolve and those funds would be available once more. You only pay interest on the amount you withdraw and not on the total amount approved for you to borrow.

1. The great advantage is that you have a lot a freedom with this kind of loan
2. You can borrow only the exact amounts you need at any time
3. You only pay interest upon what you borrow, not what you are approved for
4. It allows you to have quick access to large sums of money so you can take advantage of opportunities in your business
5. The interest rates are lower than credit cards and you typically have larger sums of money at your disposal

Credit lines are tend to incorporate variable interest rates rather than a fixed annual percentage rate so your repayments will be more changeable depending upon the amount you have withdrawn and the interest rate at that time. Once the term of your HELOC has been reached you must pay off however much you have borrowed in full and your lender can decide to issue you with a renewal line of credit. You can these home equity calculators to check up-to-date home equity line of credit rates and an amortization schedule calculator.

You can issue both checks or make payments using a credit card to withdraw funds from a HELOC. Upon approval most lenders and banks will want to to make an initial withdrawal straight away and will impose a minimum amount you must borrow each time to you take funds from the line of credit. If you sell your house during the term of the loan you’ll be required to pay back any outstanding amounts from your home equity line of credit in full just as if it were a 1st mortgage.

HELOC interest rates are set according to the prime rate which is the same for everyone plus whatever margin is set by the lender itself. The majority of reputible lenders will give borrowers the prime rate and not add any margin to it.

Should I Choose A Home Equity Loan or A Line Of Credit? Is a HELOC Right For You?

If you have very specific uses for the money then a taking a home equity loan is simpler. For example, if you wanted to put in an outdoor pool as part of a home improvement loan which was going to cost $10,000 and needed a further $20,000 to help your child with college tuition fees then the most straightforward route would be to apply for a home equity loan of $30,000. In other words, you know in advance the following things

• What you need the money for (car loan, home improvement loan, college line of credit etc…)
• How much each thing will cost
• And you don’t intend to borrow for anything else in the foreseeable future

If however you were running a business buying antiques and had no way of knowing when you would find a fine painting at auction which you could restore and resell or perhaps some antique furniture then having the freedom of being pre-approved for a line of credit is obviously much better. You’ll have the freedom to act quickly when opportunities arise and only borrow what you really need when you need it. Furthermore, if you are able to borrow in smaller amounts and pay back the principals quickly then a line of credit is actually cheaper than a home equity loan. Brokers and lenders should be able to help you come to the right decision within a short consultation.

What Happens If I Default On My HELOC Loan?

If you are up to date (current) with the repayments on your first mortgage but behind on your second mortgage then the lender of your HELOC does have the legal right to pursue a HELOC foreclosure. There are many instances however when it would not do so however as foreclosing on mortgages and loans often presents lenders with the worst economic return. They do so only as a final recourse to minimise their losses. If worth noting if you are living in one of the non-recourse states as even if the lender forecloses and does not manage to recoup its loan they cannot come after you for the balance.

Credit Card Debt Consolidation – Using a Home Equity Loan To Pay Of All Your Credit Cards At Once

This has probably become the most popular reason for people asking for home equity loans. Say a person has run up numerous credit card debts spread across different cards such as VISA, MasterCard and/or Store cards. To furnish these kinds of high credit debts can be crippling and cost a fortune in interest payments. In fact, in a worse case scenario you may find yourself only able to payback the interest on the debt without ever being able to reduce the principal itself.

One of the options would be to take a home equity loan and use the money to clear all the debts you currently have on every credit card and department store card. Instead of having to deal with numerous different companies and extortionate interest rates you’d be paying back just one sum of money to one lender and a lower interest rate. This is credit card consolidation and taking out a fixed rate home equity loan is the most popular way to deal with it. You should also check out fico-based home equity loans which rely heavily upon your credit score if you have a good one. If you have some time on your side and are thinking ahead then high yield CDs are also worth investigating.

Shop For a HELOC

Some questions to ask you lender before applying for a home equity line of credit would include

• How large an amount would I qualify for in a HELOC?
• What would the term be for a home equity line of credit?
• Would I be able to renew the line of credit upon expiry?
• What kind of circumstances would lead you to freeze the loan or demand repayment in full?
• How do the interest rates differ depending upon the term of the loan?
• Would I be able to rent my house during the term of the loan?
• Should interest rates drop how will it affect the interest rates I pay on my HELOC?

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Home Equity Lenders – “Come Prepared Or BE Prepared To Be Taken Advantage Of”