| Do you have equity in the home that you own now? Do
you need money for college education, home improvements, a long awaited vacation
or a new car? Whether you have any equity or not, you may be able to take advantage
of borrowing opportunities that did not exist one year ago.
Equity is
defined as the value in your home, and is calculated by subtracting all outstanding
mortgages from the market value of the home. Because loan balances and housing
prices are changing constantly, the equity that home owners fluctuates as well.
Lenders are less concerned with the exact dollar amount of equity in a home than
the percentage of equity. For example, a home owner with a $500,000 mortgage on
a $525,000 home has $25,000 in dollar equity but less than 5% in percentage terms.
On the other hand, the owner of a $60,000 condominium with a first mortgage of
only $40,000 has $20,000 in equity which is 33% on a percentage basis. Lenders
would prefer to lend additional funds to the condominium owner because of the
higher percentage of equity.
In is important to understand equity percentages
because the maximum percentage of combined loan to value on a property is what
has changed dramatically over the past two years. In 1995, nearly all second mortgage
lenders would not let the combined total of a borrower's first and second mortgage
exceed 80% of the value of the property. A home owner with a $100,000 home and
a $70,000 first mortgage could only borrow $10,000 (80% of $100,000 = $80,000
- $70,000 = $10,000). Today, that same home owner could not only borrow $30,000,
the entire amount of the equity in the property, but could also borrow up to 125%
of the value of the home. Unbelievable as it may sound, the borrower in the above
example could actually obtain a loan for $55,000 in addition to the existing first
mortgage.
Over the past two years, the number and type of home equity
loans available to consumers has mushroomed as banks and finance companies have
accumulated large amounts of cash that they need to lend back out to borrowers.
The highly competitive nature of home equity lending has caused lenders to offer
an increased number of programs to consumers. In addition to the usual rate competition,
lenders continued to increase the maximum amount they would loan on a property.
Programs have leaped from 80% to 90% to 100%, and 1997 have topped out at 125%.
Credit standards have been relaxed to a certain extent as well. Two years
ago, a borrower had to have excellent credit for a home equity line or second
mortgage term loan. Now borrowers who do not meet normal credit requirements will
not get rejected, but will be offered a loan at a higher rate under B-C-D credit
programs. With all of the available programs and choices, consumers have much
to consider when choosing a home equity program.
Home Equity Lines of
Credit
The typical home equity line is a form of revolving credit in which
a borrower's home serves as collateral. A borrower is approved for a specific
amount of credit-the credit limit-which will become the maximum amount that can
be borrowed under the plan. Lenders usually require the line to be at least $5,000
to $7,500, but total credit lines can range up to $500,000. Once the home equity
line is in place, a borrower can borrow up to the credit limit at any time. Many
plans require a minimum draw against the line of between $250 and $500.
The borrower is usually required to repay at least the miniumum interest due each
month for the first ten years. The interest rate on home equity lines is variable,
usually based on the prime rate (which was 8.5% in July 1997), and is capped at
a maximum that ranges from 15% to 20%. At the end of that period, most plans will
take the existing remaining balance and turn it into a 10 or 15 year fully amortizing
loan. Of course, if these programs continue to prevail in ten years, a consumer
could always take out a home equity line from another lender and gain an additional
ten years of interest-only loan payments.
Interest rates for home equity
lines are based on a number of factors. The most important factor is the total
loan-to-value that the equity line will create. The best pricing can be found
for home equity lines using 75% or less of the value of a home, with pricing increases
occurring when the total loan exceeds 80%, 90%, 100% and 125% of the value of
the home. Many borrowers at 80% or less can obtain rates at the prime rate of
8.5%, while those borrowers using the 125% loan program will pay 13% to 14%.
The loan size also determines the interest rate for many lenders. At one
institution, a $7,500 home equity line carries a rate of 9.75% while a $100,000
line is charged only 8.5%. Some programs also carry introductory teaser rates
for the first three or six months, often at 6% or less. Each institution sets
its own break points for rate differences, so be sure to investigate what is available
in your area.
Article continued at http://www.mortgagealmanac.com/articles/97-helocs.htmll
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