HELOC and everything about them (more of course to come)

What would happen to Home Line of Equity?
A home equity line of credit (often called HELOC and pronounced HEE-lock) is a loan where the lender agrees to lend a maximum amount within an agreed period. The collateral is borrower’s equity in their house.

How do they differ from a conventional loan?
Borrower does not take the whole lump sum at a time but instead withdraws smaller amount which is not allowed to exceed the credit limit. However, whole funds can be borrowed. Repayment is done with principal and interest which varies according the LIBOR or other agreed formula. The full principal amount is due at the end of the draw period, either as a lump-sum balloon payment or according to a loan amortization schedule. Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time.

What is variable Interest?
Home equity lines of credit typically involve variable rather than fixed interest rates. The variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). In such cases, the interest rate you pay for the line of credit will change, mirroring changes in the value of the index. Most lenders cite the interest rate you will pay as the value of the index at a particular time, plus a “margin,” such as 2 percentage points. Because the cost of borrowing is tied directly to the value of the index, it is important to find out which index is used, how often the value of the index changes, and how high it has risen in the past. It is also important to note the amount of the margin.

How the cost of HELOC is determined?Costs of establishing and maintaining a home equity line
Many of the costs of setting up a home equity line of credit are similar to those you pay when you buy a home. For example:
– A fee for a property appraisal to estimate the value of your home;
– An application fee, which may not be refunded if you are turned down for credit;
– Up-front charges, such as one or more “points” (one point equals 1 percent of the credit limit); and
– Closing costs, including fees for attorneys, title search, mortgage preparation and filing, property and title insurance, and taxes.

How interest on a HELOC is calculated?
The balance of a HELOC may change from day to day, depending on draws and repayments, interest on a HELOC is calculated daily rather than monthly.

What are the advantages of HELOCs?

1. HELOCs are convenient for funding intermittent needs such as house projects, college loans and unsecured credit cards payment.

2. HELOCs can be convertible into fixed-rate loans at the time of a drawing.

What are the disadvantages of a HELOC?
The lender can cut an unused credit line, and in fact, lately they have cut many credit lines.

What happened to HELOC when your home is foreclosed?
Even if your home is sold in foreclosure, you may still be on the hook for the difference between the amount you owe the bank and the amount the property sold for. In other words, this is called deficiency judgment. The banks are busy at this time, but they may very likely to come back and sue you. Also, they have been selling these notes to many collection agencies who are suing on their behalf.
In non-recourse states, homeowners cannot be held personally liable for more than a forclosed property sells for. The debt is completely satisfied at the time of sale and lenders cannot sue to make up for lost funds. To learn more, take a look at this list of non-recourse states.
Keep in mind that laws change from time to time and that state code can be complicated to understand. If you’re facing foreclosure, consult with an attorney before making any decision based on potential recourse.

Did your lender provide you disclosures?
The federal Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. And in general, neither the lender nor anyone else may charge a fee until after you have received this information. You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term (other than a variable-rate feature) changes before the plan is opened, the lender must return all fees if you decide not to enter into the plan because of the change.

When you open a home equity line, the transaction puts your home at risk. If the home involved is your principal dwelling, the Truth in Lending Act gives you 3 days from the day the account was opened to cancel the credit line. This right allows you to change your mind for any reason. You simply inform the lender in writing within the 3-day period. The lender must then cancel its security interest in your home and return all fees–including any application and appraisal fees–paid to open the account.


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