Q: What is the difference between a Home Equity loan and a Home Equity Line of Credit?
A: Home equity loans (HEL) are fixed-interest loans providing the borrower a lump-sum amount based on income, loan- to-value ratio, credit history, and credit score. Interest paid on HELs may be tax deductible. A home equity line of credit (HELOC) uses the borrower's home as collateral against a revolving credit account with a cap based on the appraised value of the home minus the balance on the mortgage. HELOCs typically feature variable-interest rates, with repayment due at the end of the draw date. Read about the differences between a home equity loan and a HELOC.
Q: How do you compare a cash-out refinance to a home equity loan?
A: Both cash-out refinancing and home equity loans can be used as the homeowner wishes. Generally speaking, a cash-out refinance may be better for borrowers who need a large source of money to retire/consolidate debt, while a home equity loan is suited for owners who want to keep their mortgage but open a source of cash via a home equity line of credit more suited for home improvement projects, college tuition, or medical expenses. Knowing the distinctions and when to use each product can help you choose the right solution.
Q: Are payments made on home equity loans tax deductible?
A: According to the IRS, any interest paid on a loan secured by a primary or second home is deductible if the taxpayer itemizes payments on a qualified home they own on Schedule A (Form 1040). Interest is only deductible on properties with a secured debt including mortgages, land contracts, and deeds of trust. Discover the law and how it affects deductions on paid mortgage interest.
Q: What are popular uses of home equity loans?
A: Home equity loans are commonly used to consolidate debt at lower interest rates, to undertake home improvement or repair projects, to pay for college, or on major purchases such as energy efficient appliances or gas-thrifty cars. One popular use is to pay off first mortgages, make investments, or round up cash for business.
Q: What can I do to receive better home equity interest rate?
A: Establishing and maintaining good credit is essential in landing the best interest rates on loans and refinances. Evaluating offers from lenders and looking into repeat lenders offering breaks for loyalty can also drive down points. Some banks may offer 25 basis point (bps) reductions to loan customers who use their proprietary checking accounts to make loan payments. The lending industry also allows borrowers to "buy down" their interest rates with mortgage discount points. "Buying down" involves origination charges and paying a percentage of the loan upfront. The interest paid in "buying down" is tax deductible.
Q: What is CLTV and how is it calculated?
A: Combined Loan to Value ratio (CLTV) is used by lenders to determine the financial fitness of borrowers seeking additional loans on a property in addition to the primary mortgage, such as a home equity loan or HELOC. For example, the owner of a home valued at $100,00 with a $60,000 first mortgage and a $30,000 home equity loan would receive a loan to value ratio for the first mortgage of 60 percent ($60,000 / $100,000) and a CLTV of 90 percent ($60,000 + $30,000)/$100,000. Lenders may approve CLTV ratios of 80% or higher for those with excellent credit ratings.
Q: Are there different types of home equity loans?
A: Borrowers have a choice among home equity loan products. For example, there are fixed-rate loans that do not fully amortize over the term and require a balloon settlement at the end. Terms are less than 10 years and often come with favorable interest rates. There are Fixed 125 - No Equity Specialist loans that can be the only option for borrowers with insufficient equity to secure a traditional loan or HELOC. These are typically debt consolidation loans and a loan of last resort for consumers facing considerable debt and seeking a second mortgage.
Q: I recently purchased a home. Do I still qualify for Home equity loan?
A: It depends on a number of financial and credit factors. During the qualifying process, lenders will assess your credit history and the home's loan-to-value ratio (equity). Most lenders will not approve home equity loans above 80 percent of the value. Consequently, the amount you may borrow can rise or fall based on current assessments.