 |
|
|
|
Home equity line of credit (HELOC)
A home equity loan is simply a loan that is taken
out with the equity of a borrower’s home used as collateral. This may
or may not be a second mortgage, since a home equity loan can be taken
out on a home that is owned free and clear.
A home equity loan may be for either a fixed dollar
amount, or it may be structured as a line of credit. For the latter,
this is known as a home equity line of credit, or HELOC. These
typically carry an adjustable rate, and let you spend money up to the
amount of equity that has been pledged, over a period of time, as
needed, using a special-purpose debit card or by writing a check. The
upfront costs are typically low, and you will usually not have to pay
points for this type of loan.
It’s important to know that since you are able to
draw money at any time, interest is calculated daily, instead of
monthly, although usually the bottom line difference in interest is
negligible. The biggest drawback of this type of loan instrument is
that you re exposed to changing interest rates. A HELOC will always be
structured as an adjustable rate mortgage, but unlike a standard ARM,
a HELOC will reflect changes in the interest rate much faster. If you
intend to take out a sizeable sum of money at one time, it may be
better to see if your lender will allow you to convert the line of
credit into a fixed-rate loan at the time you draw the funds.
Also, unlike a standard ARM, a HELOC does not have
a rate cap outside of the legal maximum that is allowed in a given
state. The home equity loan is based on prime rate plus a margin, but
often, this margin is not disclosed unless you specifically ask the
lender for that information. Being told that your home equity loan is
based on prime rate sounds good, but it can be misleading. What the
lender means when they say that, is that they are going to lend you
money based on the prime rate plus an undisclosed added percentage,
which can be substantial. A home equity loan can bring you tremendous
flexibility with minimal added costs, by giving you the power to
leverage your home, but be sure to know the exact terms of the loan
before you enroll.
Home equity is the value of
a homeowner's unencumbered interest in their property, i.e. the
difference between the home's fair market value and the unpaid balance
of the
mortgage and any outstanding debt over the home. Equity increases
as the mortgage is paid or as the property enjoys
appreciation. This is sometimes called real property value
in economics.
Technically, home equity has a zero
rate of return and is not liquid. So-called home equity
management is the process of using equity extraction via loans, at
favorable and often tax-favored
interest rates, to invest otherwise illiquid equity in a target
that offers higher returns. This can be considered a form of
arbitrage.
Arbitrage is in essence borrowing money at one rate and earning a
higher rate elsewhere. In home equity management, home equity is
reduced, and the owner's
liability is increased. Therefore, safety and liquidity are
essential to preserving nominal home equity. Consequently, the process
excludes all equity extraction that is actually spent or invested in
non-liquid ways.
Home equity is frequently used as a form of collateral to obtain
loans such as HELOC
and
home equity loan. Interest paid on such loans can be partially tax
deductible in the United States and other countries.
 |
|
About Home Equity
Loans
When it comes time to do a home equity
refinance there are several terms that you should be familiar with. Many people do not
understand how a home equity loan works or even
what home equity is. There are two basic types
of loans you can get when it comes to home
equity; an equity loan or a home equity line of
credit.
So what is home equity? Quite simply it is
the difference between what you still owe on
your home and its appraised value, or what your
home is worth. Here's a simple example. If your
home is appraised at $150,000 and you still owe
$50,000 on your mortgage the equity in your home
is $100,000.
When you take out a home equity loan, or
refinance your current home equity loan, you are
borrowing against that equity you have built up
in your home. This type of loan will give you a
one time lump sum in the form of a check that
you can do whatever you choose with. You will
have to pay it with a monthly payment over a set
amount of months, much like a mortgage.
A home equity line of credit works a little
differently. You still are able to borrow a
specific amount of money based on the equity in
your home, but the money is not paid out in a
lump sum. You can tap into your line of credit
as needed, much like we do with a credit card.
The nice thing about a home equity line of
credit is you only have to make payments on the
money you have borrowed. If you have a $10,000
line of credit and your use $3,000 to do some
home remodeling you will only make payments on
the $3,000. It is important to remember that
just like any other loan you will be paying
interest on any money you use out of your credit
line.
When you are looking to do a home equity
refinance loan you must realize that you are
using your home as the collateral in order to
get the loan. You are guaranteeing your ability
to repay the loan against the value of you home.
If for any reason you cannot make your payments
the lender has every legal right to foreclose on
your home so they can sell it to cover the value
of the loan.
One of the best reasons to do a refinance
your current home equity loan is to get a lower
interest rate. If your original loan had a high
interest rate you can save quite a bit of money
if you are able to obtain a lower rate.
If you are thinking of doing a home equity
refinance then do some research and get at least
four quotes from reputable lenders to see which
package may work best for you.
New Home
Purchase Mortgage
A mortgage is a negotiable
instrument, like stocks and bonds. It can be
bought and sold, or used as collateral. While
the quasi-government entities Fannie Mae and
Freddie Mac are the nation’s largest purchaser
of mortgages, other financial institutions, or
even individual investors may also purchase
mortgages as investments. Fannie and Freddie
purchase mortgages for two reasons.
Of course, they are private
enterprises of sorts, and need to make a profit.
But also, they have a mandate from the federal
government to promote homeownership, and when
they purchase mortgages from lenders, those
lenders can use the money they receive to make
new mortgages, and therefore make more loans
than would otherwise be possible.
However, big institutions
like Fannie and Freddie, mortgage companies and
banks are not the only ones who can buy and sell
mortgages. There are several situations where an
individual investor may profit from purchasing
an existing mortgage.
For example, suppose a person
sells a piece of property, and agrees to help
with the financing, perhaps because the buyer is
unable to qualify for a bank mortgage. The
seller then issues a “land contract,” which is a
private agreement between two individual
parties, where the buyer makes monthly payments
to the seller directly, instead of going through
a traditional mortgage lender. The seller then,
as opposed to a bank, is the mortgage holder.
Investors often purchase these land contract
mortgages at a discount, and then take over
servicing the loan, freeing the seller from
having the collect monthly payments on the
property and instead receiving a lump sum.
Purchasing mortgages in this way can be a very
strategic and profitable investment, since you
not only gain the interest on your return as it
is being paid by the homeowner, you also get the
benefit of the discounted rate at which you
purchase the note.
For example, suppose a seller
holds a land contract for $100,000. You, the
investor, buy it for $90,000. But the homeowner
who lives in the home still owes you the
$100,000. You get the difference, and you are
also getting interest on the full amount.
|
|
 |
