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Some have an aversion to home equity lines of credit because they feature variable rates and people think that they can turn out too expensive. Truth is that if you have discipline, the interest rate cannot get that high and they provide such a huge flexibility covering all your cash needs that they are well worth the difference.
Defining Home Equity
Home equity can be described as the value in your home, calculated with subtractions of all outstanding mortgages from its market value. The constant change in loan balances and housing prices results in fluctuating equity of home owners as well. For lenders the concern is the percentage of the equity rather than the exact dollar amount of home equity. Take the example of a homeowner with a $500,000 mortgage on a $525,000 home has $25,000 in dollar equity but less than 5% percentage. In contrast, the owner of a $60,000 condominium with a first mortgage of just $40,000 has $20,000 in equity, or 33% in percentage. The condominium owner is preferable for lenders for additional funds due to the higher equity percentage.
Understanding equity percentages is necessary as the maximum percentage of combined loan to the property value has witnessed dramatic changes in the last two years. With a $100,000 home and a $70,000 first mortgage, a homeowner was able to borrow only $10,000 (80% of $100,000 = $80,000 - $70,000 = $10,000) some years back. Now the same homeowner can borrow $30,000, the entire amount of the equity in the property apart from lending up to 125% of the value of the home. It may sound unbelievable but you can get a loan of $55,000 apart from the existing first mortgage.
Flexible Requirements
In the last two years a spurt in cash accumulation in banks and finance companies has led to an increase in the number and types of home equity loans for consumers. Being highly competitive home equity lending is being offered in more programs to consumers. Besides the usual rate, due to competition, lenders continue hiking the maximum loan amount on a property. As a result programs have rapidly shot up from 80% to 100% and in 1997, topped out at 125%.
Credit standards have also been considerably relaxed. Candidates unable to meet credit requirements are not rejected, but offered higher rate loans under B-C-D credit programs. With abundance of choices, consumers have a lot to consider for home equity programs.
A borrower gets approval for a certain credit limit under the plan, with the line being at least $5,000, while total credit lines going up to $500,000. After securing the home equity line, borrowing up to the credit limit is possible at any time.
Repayment installments are usually the minimum interest due every month for the first ten years. The interest rate on home equity lines can be on the prime rate to a maximum of 15% to 20%. When the period ends, the existing remaining balance is usually turned into about a 10 year fully amortizing loan. In the event of the programs continuing in ten years, a home equity line can be taken from another lender for an additional ten years of interest-only loan payments.
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