Posted on: 18th May, 2006 09:49 pm
If you're thinking about ways to tap your financial resources, you'll find that utilizing your home equity is often a viable option. Your home equity is the current value of your home minus the money you owe on the mortgage. A simple way to get the most out of your equity if you're in a financial crunch is to take out home equity line of credit, which is a kind of second mortgage.
A Home equity line of credit (HELOC) gives you the opportunity to fulfill your financial needs using your home equity as security for a loan. For buyers that don't have any money for down payment, a home equity line of credit is a good option. With a line of credit, you never borrow beyond a certain credit limit, which helps you to manage your debts better.
How a HELOC works
A home equity line of credit works like a credit card where you can withdraw cash up to a predetermined limit any time within the draw period. It's easy to access the funds in a HELOC by writing a check, using a credit card, or by using a debit card that accesses the line of credit.
When you take advantage of a HELOC, you are required to make a minimum monthly payment that covers the interest. But you can also pay down the principal so that your debts are cleared and you can withdraw funds again if the draw period isn't over.
Once the draw period ends, you can ask for a renewal or you can no longer access the cash once the draw period expires. The repayment period starts once the draw period has expired and the HELOC takes the form of an adjustable rate mortgage (ARM) that requires you to pay down the loan in regular installments.
In most cases, you have a draw period of 5 to 10 years, after which the repayment period is typically 10 to 15 years. There are lenders who offer HELOCs with no fixed terms for withdrawal and repayment of loan; you can carry on with the loan until you sell the property.
Here's an example on how a HELOC works:
Suppose you have a line of credit of $10,000.
You borrow $6,000 in order to pay for a kitchen remodel.
You owe the $6,000 you've already taken and the remaining credit available is $4,000.
If you pay back $2,000, you still owe $4,000.
So, you have $6,000 ($4,000 + $2,000 = $6,000) in available credit.
When you take advantage of a HELOC, you are required to make a minimum monthly payment that covers the interest. But you can also pay down the principal so that your debts are cleared and you can withdraw funds again if the draw period isn't over.
Once the draw period ends, you can ask for a renewal or you can no longer access the cash once the draw period expires. The repayment period starts once the draw period has expired and the HELOC takes the form of an adjustable rate mortgage (ARM) that requires you to pay down the loan in regular installments.
In most cases, you have a draw period of 5 to 10 years, after which the repayment period is typically 10 to 15 years. There are lenders who offer HELOCs with no fixed terms for withdrawal and repayment of loan; you can carry on with the loan until you sell the property.
Here's an example on how a HELOC works:
Suppose you have a line of credit of $10,000.
You borrow $6,000 in order to pay for a kitchen remodel.
You owe the $6,000 you've already taken and the remaining credit available is $4,000.
If you pay back $2,000, you still owe $4,000.
So, you have $6,000 ($4,000 + $2,000 = $6,000) in available credit.
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Let me add some information about how the interest is charged on a HELOC.
Balance on this type of loan can change on a daily basis as the borrower draws from the credit line and makes repayments. So interest on a home equity line of credit is calculated daily instead of being calculated monthly. Let me give an example of how it works.
Suppose on an frm of 6%, interest is calculated every month as .06 (6% or 6/100 = .06) divided by 12 (months) which comes out to .005, this is multiplied with principal balance amount as on last day of previous month. If the balance amount was $50,000, then interest to be paid that month would be $250.
While for a HELOC with 6% rate, interest on a daily basis is calculated as, .06 divided by 365 = .000164, this is then multiplied with average daily balance for that month. And if the balance happened to be $50,000, then daily interest will be $8.2 and for the month it will be $246 while for a 31 day month, it will come out to $254.2 .
David
Balance on this type of loan can change on a daily basis as the borrower draws from the credit line and makes repayments. So interest on a home equity line of credit is calculated daily instead of being calculated monthly. Let me give an example of how it works.
Suppose on an frm of 6%, interest is calculated every month as .06 (6% or 6/100 = .06) divided by 12 (months) which comes out to .005, this is multiplied with principal balance amount as on last day of previous month. If the balance amount was $50,000, then interest to be paid that month would be $250.
While for a HELOC with 6% rate, interest on a daily basis is calculated as, .06 divided by 365 = .000164, this is then multiplied with average daily balance for that month. And if the balance happened to be $50,000, then daily interest will be $8.2 and for the month it will be $246 while for a 31 day month, it will come out to $254.2 .
David
what disclosures lender is required to make for a home equity plan?
Hi Spero,
Welcome to Mortgagefit discussion board.
As per Truth in Lending Act, lender is required to make disclosure regarding all the important terms & costs of the home equity plans they offer. Such as the APR, payment terms, miscellaneous charges and details of variable rate feature for their loans.
Additionally lender cannot charge you any fee until you have been provided all these disclosures. These disclosures are provided when a person is given the application form. Some additional disclosures are provided when the home equity plan is opened.
TILA also states that lender has to return all fees charged if any of the terms of the plan change (except for the variable rate feature) before the plan is opened and because of which you decide not to open the plan.
Do let me know if you have any other questions.
Thanks
Blue
Welcome to Mortgagefit discussion board.
As per Truth in Lending Act, lender is required to make disclosure regarding all the important terms & costs of the home equity plans they offer. Such as the APR, payment terms, miscellaneous charges and details of variable rate feature for their loans.
Additionally lender cannot charge you any fee until you have been provided all these disclosures. These disclosures are provided when a person is given the application form. Some additional disclosures are provided when the home equity plan is opened.
TILA also states that lender has to return all fees charged if any of the terms of the plan change (except for the variable rate feature) before the plan is opened and because of which you decide not to open the plan.
Do let me know if you have any other questions.
Thanks
Blue
what are participation & transaction fees for helocs
Hi Cantina,
Welcome to Mortgagefit forum.
Participation fee is what is charged annually to have the line of credit available. Generally it is charged regardless of you are using the credit line or not.
And the transaction fee is an amount charged every time a borrower draws on his credit line.
Colin
Welcome to Mortgagefit forum.
Participation fee is what is charged annually to have the line of credit available. Generally it is charged regardless of you are using the credit line or not.
And the transaction fee is an amount charged every time a borrower draws on his credit line.
Colin
I am in Colorado and have a second house with a heloc. I am thinking of a foreclosure with heloc balance of $50K, or a short sale – which is my best option? Would the lender forgive the balance on either of the processes. Would they go after my first mortgage and home after I tell them I 'll go for foreclose or short sale? The home is the only one I have and would surely not like to lose it.
I am very thankful for your website. It is very informative. Keep up the good work.
Hello Ravello,
Thanks for your appreciation.
Thanks for your appreciation.
My spec house would not sell and forclosed 2 months ago. The line of credit against( used to make the morgage payments untill the house sold) is about 35k and they want the money. I was told by a lawyer in the state of the forclosure that the line would go as well. Is this not the case?
Hi Noah,
Welcome to forums.
You mean the lender wants the entire 35K which was unpaid and because of which they foreclosed? How is this possible? Was the lender able to recover the unpaid debt entirely through the foreclosure?
In case, the lender hasn't been able to recover the unpaid debt in full, he may ask you for the deficit amount and perhaps that's the reason they're now asking for money. Just have a clear talk with the lender. I think somehere there's a kind of communication gap. Oh, by the way, is it that the first mortgage debt could be recovered but not the line of credit? Then that's the reason they're asking for 35K. What you can do now is, request them to charge-off or cancel the debt if you are not able to pay off the line of credit.
Thanks
Welcome to forums.
You mean the lender wants the entire 35K which was unpaid and because of which they foreclosed? How is this possible? Was the lender able to recover the unpaid debt entirely through the foreclosure?
In case, the lender hasn't been able to recover the unpaid debt in full, he may ask you for the deficit amount and perhaps that's the reason they're now asking for money. Just have a clear talk with the lender. I think somehere there's a kind of communication gap. Oh, by the way, is it that the first mortgage debt could be recovered but not the line of credit? Then that's the reason they're asking for 35K. What you can do now is, request them to charge-off or cancel the debt if you are not able to pay off the line of credit.
Thanks
I've bought a house for $120,000 and then I took out a heloc worth $30,000. now if I sell the house for $2,20,000, do I owe capital gains taxes on $120,000 or on 70,000?
Hello Adrian,
You have to pay the capital gains tax on the difference between the original amount which you paid for purchasing the property and what you receive when you are selling the property. So, in your case the difference is $100,000.
But if this is your primary residence, you may make up to $250,000 profit without paying the taxes if you are a single owner and twice the amount if you are married and filing the returns jointly. In that case you have to occupy the residence for a minimum of 2 years out of the past 5 years prior to the sale.
For further information on capital gains exemption, you may look here http://www.mortgagefit.com/budgeting-finance/capitalgainsexemption.html
You have to pay the capital gains tax on the difference between the original amount which you paid for purchasing the property and what you receive when you are selling the property. So, in your case the difference is $100,000.
But if this is your primary residence, you may make up to $250,000 profit without paying the taxes if you are a single owner and twice the amount if you are married and filing the returns jointly. In that case you have to occupy the residence for a minimum of 2 years out of the past 5 years prior to the sale.
For further information on capital gains exemption, you may look here http://www.mortgagefit.com/budgeting-finance/capitalgainsexemption.html
Hi Adrian,
Capital gains is based on the difference between what you paid for the home and the cost of iimprovements and the sale of the home. It is not based on what you have borrowed against the home. So to calculate capital gains, take the sales prices and subract what you paid for it and all the improvements you have done (actual cost) to determine capital gains tax. If you have lived in the property for 2 out of the last 5 years then you should be exempt from this tax up to 250K if single and 500K for a married couple.
Capital gains is based on the difference between what you paid for the home and the cost of iimprovements and the sale of the home. It is not based on what you have borrowed against the home. So to calculate capital gains, take the sales prices and subract what you paid for it and all the improvements you have done (actual cost) to determine capital gains tax. If you have lived in the property for 2 out of the last 5 years then you should be exempt from this tax up to 250K if single and 500K for a married couple.
Does opening a Heloc with high limit affect FICO score?