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How Much Money Can You Borrow on a Home Equity Credit Line?


How Much Money Can You Borrow on a Home Equity
Credit Line?
Depending on your income, credit rating, and the amount of your
current debt, home equity lenders may let you borrow up to 85% of
the appraised value of your home minus the amount you still owe on
your first mortgage.
If you are using the home equity funds for rehabbing and need to
pay your obligations with repairpeople on time, it’s important to ask
your lender about whether there are minimum or maximum with-drawal requirements after your account is opened. And make sure
you know about how you gain access to your credit line—with either
lender drafts or checks.
You also want to know if your home equity plan sets a fixed
time—a draw period—when you can make withdrawals from your
account. Should you need funds you have not drawn upon, you don’t
want to be stopped from receiving funds once the period expires.
BE PRUDENT IN RISKING THE EQUITY IN YOUR HOME
It’s tempting to use the equity in your own home, through either a
second mortgage or a home equity loan, as a down payment on another
property. However, there are several pitfalls, such as getting
your home payments too high, raising your interest rate, and lowering
the home equity you might need in a true emergency. If you
don’t disturb this equity, you’ll have greater peace of mind.
So, try to keep your own home as free as possible of debt. You
don’t want to put your home in jeopardy. Remember, debt is what
causes bankruptcies. Contrary to the advice of “fast money” gurus,
for example, you should never buy a property and receive money at
the closing. That usually means you are borrowing more than you
should for the property—a recipe for financial disaster.
Furthermore, borrowed money is not tax-free. You have to pay
this money back with after-tax dollars. Besides, if the worst happened,
the IRS considers any foreclosure a sale where there is any
mortgage over the current tax basis; this additional sum is treated as
profit, giving you a large tax liability. Having received this warning, if
you need a small amount from a home equity loan, and you are absolutely
sure about the property (it will sell quickly for top dollar
once repaired) and its price (you’re buying at rock bottom), go
ahead—cautiously.

What Is the Interest Rate on a Home Equity Loan?



What Is the Interest Rate on a Home Equity Loan?
Interest rates for home equity loans can vary from lender to lender.
Always check for the latest prices. Further, you want to compare the
annual percentage rate (APR), which indicates the cost on a yearly
basis. And be aware that the APR for a home equity loan is based on
interest alone and you must add in points and closing costs for a true
comparison. Note that when you compare a home equity credit line
with a traditional installment (or second) mortgage, the APR for the
latter usually includes the total costs for the loan.
If you are considering a variable rate, check and compare the
terms with a fixed rate. Check the periodic cap, or the limit on interest
rate changes at one time. Also, check the lifetime cap, which is
the limit on interest rate changes throughout the loan term.
Further, ask the lender which index (such as the prime rate) is
used to determine how much to raise or lower interest rates, and
how much and how often it can change. And check the margin,
which is an amount added to the index that determines the interest
you are charged. Margins may vary considerably between lenders. In
addition, inquire whether you can convert your variable rate loan to
a fixed rate at some future time.
Sometimes lenders offer a temporarily discounted interest
rate—a rate that is unusually low and lasts for only an introductory
period, such as six months. After the introductory period ends,
however, your rate (and payments) will increase to the true market
level (the index plus the margin). So ask if the rate you are offered
is discounted, and, if so, find out how the rate will be determined at
the end of the discount period and how much larger your payments
could be at that time.