Rating:
1 user(s) have rated this article
5.0
Abstract:
Many readers of One Paycheck at a Time have asked the question of whether it makes sense to consolidate credit card debt into a home equity line of credit or home equity loan. In this interview, Dwight Crawford, a licensed loan officer, answers these mortgage loan questions.
Griffiths:
Before we get started with the interview about creative ways to consolidate credit card debt for homeowners, the questions posed in most of these interviews have been at some point asked to me by my readers. I’m fortunate now to have an expert in the mortgage industry who can answer these sometimes really complicated and difficult questions.
First, could you please clarify the difference is between a home equity credit line versus a home equity loan?
Crawford:
A home equity loan is a loan that is secured by your home. If you repay the loan as agreed, your lender will discharge the mortgage. If you do not repay the loan as agreed, your lender can foreclose on your home to satisfy the debt. Generally, the amount that you can borrow is limited to 80 percent of the equity in your home, although in some situations this amount may be higher. The actual amount of the loan will also depend on your income, credit history, and the market value of your home. The two distinct types of home equity loans are the home equity line of credit (HELOC) and the closed-end home equity loan, often referred to as a second mortgage.
A HELOC, which is the more popular loan, is structured as a revolving line of credit. You can borrow as much as you need, whenever you need it, by writing a check as long as your total borrowing does not exceed your credit limit. Because it is a line of credit, you make payments only on the amount you have actually borrowed, not the full amount available. Borrowers will usually set up a HELOC so that it is available for unexpected expenses. It may also be beneficial to use your home equity loan to purchase a car or pay your child's college tuition, since the interest is generally tax deductible.
A closed-end home equity loan, or second mortgage, is a loan for a fixed amount of money that must be repaid over a fixed term, just like your original mortgage. Borrowers typically use closed-end home equity loans to pay for a single large expense, such as a major home improvement or college tuition.
Griffiths:
So, I will use the term line and loan throughout this interview, but at least we are all familiar with the differences. I often hear people mention the mortgage term “125 home equity loans.” How is that different than a regular home equity loan?
Crawford:
The“125 equity loan”, is an equity loan that is also tied to your home but it allows for a homeowner to exceed the available equity in their home by 125% of the value. What this means is that if your home is valued at $150,000 you would be allowed to borrow up to $187,500 minus what ever is owed on your first mortgage. This type of loan is recommended to borrowers that have excessive consumer debt, and will be able to lower their monthly obligations considerably through a consolidation. This type of loan is based primarily on credit history and credit scores.
Griffiths:
Regardless of the type of home equity loan a person chooses, is this what is referred to as a second mortgage? How does that work?
Crawford:
Yes. A home equity loan is a second lien position on your home. At the closing of the equity line or loan, the banks attorneys, escrow company or title company will file a lien on the home. This entitles the lender to initiate a foreclosure in the event of a payment default.
Griffiths:
I’m often asked if it’s better for homeowners to consolidate their debt with a home equity line (or home equity loan) or if they should consolidate all the debt into one credit card. What would you advise the One Paycheck at a Time readers who want to really get out and stay out of debt?
Crawford:
Credit card debt is not designed to be paid off. Interest is compounded on a daily basis. If you have the equity in your home, you have to ask yourself; how much money is the equity in your home earning for you? The answer is nothing! Then ask yourself; how much money are you loosing daily on your credit cards?
Griffiths:
Can a homeowner still qualify for a home equity loan with bad credit?
Crawford:
There are a few non-conventional lenders that will lend equity money to less than perfect credit. Typically the rates are higher as well as the closing cost. Always weigh the cost of the loan both short term and long term vs. the monetary benefit of the loan. The key questions to ask are:
- Is my monthly out lay going down?
- Will this help my credit rating?
- Will I be able to afford this loan over the long run?
Griffiths:
If a person goes further into debt after they consolidated their credit card debt with a home equity credit line, could they lose their house?
Crawford:
Yes. There is an old saying that you can’t put a band-aid on a bullet hole. An equity loan can fix the problem for now, but without changing your spending habits your financial bleeding will continue.
Griffiths:
What’s the difference between a low interest home equity loan and a fixed rate home equity loan?
Crawford:
Most home equity loans are adjustable rate loans. They have a much lower start rate and most likely will go up. A fixed rate home equity loan will not adjust but has a much higher rate. What I tell all of my clients is to look at their situation. If we are consolidating debt and saving money will we loose the savings when the adjustable rate changes. The key to this type of loan is that you are only paying on the amount that you use not the amount that you borrow. Once again responsible spending will be the key to your success with this kind of loan.
Griffiths:
How does a person get the best interest rate on a home equity line of credit?
Crawford:
As with any business the banking world is based on risk verses reward. If you the consumer lower the risk for the bank then not only will the bank reap the rewards of having a client that pays the debt well, but you the client will be able to have the money saving advantage of a lower interest rate. A sure fire way to lower that risk is to have enough equity in the home, have control over your credit and make sure that you are not borrowering more than you can afford.
Dwight Crawford is a licensed loan officer, Certified Mortgage Consultant as well as the Chief Executive Officer of the Charlotte, NC based Crawford & Associates Professional Mortgage Planners. With over 15 years in the residential, commercial and small business mortgage lending world, Mr. Crawford is dedicated to education of his clients to show them that a mortgage is not just a bill that has to be paid but it is an invaluable tool to eliminate debt and to create wealth. For a private consultation Mr. Crawford can be reached directly at 516-395-3246 or by email at crawford.associates@hotmail.com.
Related Articles:
How to Choose the Right Mortgage Lender When Securing a Home Equity Line of Credit
How would you rate this article?
User Feedback
Post your comment