Many homebuyers were able to buy and refinance homes with low rates between 2020 to 2022, which was great. Now, though, many seeking to tap into their equity find themselves stuck with a dilemma: Do I give up my low interest rate to get cash out of my home, or stay where I am?
Home Equity Lines of Credit (HELOCs) can play an important role in tapping into equity in one’s home. They do not require any changes to the first trust mortgage loan rate and are a secure source of accessing cash to fund emergencies, projects, or personal needs as they arise. HELOCs are generally smaller loan amounts for specific needs, and generally are in “second” lien position behind a first trust mortgage loan.
While borrowing on the value of one’s own home would seem to make good financial sense, here are some ABCs to remember about HELOCs.
A is for ADJUSTABLE.
In general, HELOC interest rates are adjustable and are based on an index such as the Wall Street Journal Prime rate (“Prime Rate”). This means that as the Prime Rate goes up or down, the interest rate on a HELOC could go up or down and the payment amount on the HELOC could also go up or down. The current Prime Rate is 8.50% as of July 27, 2023, up from 8.25% in March of 2023. It is the 10th time that Prime Rate has increased since March 17, 2022.
B is for BORROW
Most HELOC lenders will let you borrow up to a certain percentage (“Loan-to-Value”) of the current appraised value of the home, less the balance of the first trust mortgage. And just like a Deed of Trust for an existing first trust mortgage loan, there is a Deed of Trust for a HELOC that must be recorded in the county records and must be paid off when the home is sold.
Many banks may offer to pay some of the closing costs associated with a HELOC up to a certain amount; this amount paid by a bank will vary. Be aware that some HELOCs when paid off within the first few years, may require the borrower to repay the closing costs paid by the bank.
C is for CREDIT.
Like a first trust mortgage loan, credit and property requirements apply and may be different at each bank. Requirements may include:
A credit report ordered by the bank.
An appraisal ordered by the bank to establish the property’s current value.
Verification of income to review and evaluate the ability to repay.
A flood certificate ordered by the bank to ensure the property is not in a flood zone known as Special Flood Hazard Area. If it is then flood insurance may be required.
Convert: After the initial draw period, which is generally 10 years, the loan could convert to a repayment period for the final remaining term. During the repayment period, funds can no longer be borrowed from the HELOC and the principal and interest due must be repaid.
If you have further questions, please contact us at ConsumerLoan@EagleBankCorp.com or call 301-986-1800.
This is not a commitment to lend. To be eligible, borrower must meet underwriting and program guidelines. All loan applications are subject to credit and property approval. EagleBankCorp.com NMLS #440513 Member FDIC
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Source: Washington Informer