Everything You Want to Know Before You Borrow Home Equity
So you’re thinking about borrowing home equity, but you have a bunch of questions. What kinds of rates can I expect? What sorts of penalties should I look out for? What are the requirements?
Thankfully, we can answer all of these questions and give you a clear idea of what sorts of options you can choose from so you can select the best home equity loan that fits your situation. Everyone wants to get the most bang for their buck, so let’s take a look at what sorts of factors you should be aware of when considering a HELOC.
What's My Rate?
This is by far the most frequently asked question of our loan officers regarding home equity loans or HELOCs.
SHORT ANSWER: A borrower's rate is based on the borrower's credit rating and the combined loan-to-value (CLTV) of the subject property. HFCU's HELOC rate set at time of closing is tied to the WSJ Prime Rate and is reviewed monthly. The HEL rate is fixed for the term of the loan.
Two things determine the rate you pay for a HELOC. The first thing you have no control over. The second thing, you have total control over.
- The Prime Rate: Our rate is based on the WSJ Prime Rate. We review it monthly and usually set it at the beginning of the month. WSJ stands for the Wall Street Journal. Each weekday, this newspaper surveys at least 70% of the 30 largest banks and publishes the consensus prime rate. The WSJ Prime Rate is widely known as the "official" source of the prime rate. You have no control over this rate but you can monitor it with an eye towards getting a loan when the rate is down. If you are looking for a line of credit, the rate will fluctuate.
- Your Credit Score: This aspect of determining your HELOC rate is something that you have complete control over. The better your credit, the lower the rate you will pay. The rates you see advertised at any financial institution always have a footnote that reads something like: "Rates shown are for members with the best credit profile. Other rates are available, based on your credit history. Contact us for rate details."
Even a small increase in your credit score can save you big bucks over the life of a loan. So, while you're shopping rates, take the time to review your credit report and score. If you're not sure how to get or read your credit score, you can sign up for a free credit score review. Our experts will color code your credit report for you and walk you through how to read and understand it.
Do You Require an Appraisal for a Home Equity Loan?
When we receive an application for a home equity loan or HELOC, we have to determine the value for the property. This, in turn, allows us to determine the amount that can be borrowed. However most times with these loans, a full appraisal is not required. Here's why.
We have a number of resources that can give us an accurate valuation of a home. One is an automated valuation based on the data about your home kept on public records. Other times, a simple drive by from an appraiser will suffice. As long as the public record data on your home is accurate, these types of appraisals are quite accurate.
Why Do We Require a Valuation or Appraisal for HELOCs?
A real estate appraiser interprets the market to estimate a property's value. The goal of an appraiser is to supply a realistic judgment about a property's actual worth at the time of the appraisal. Appraisers compile data about the site of the property and the stability of the neighborhood, amenities such as special kitchens or baths, and the physical condition of the property. Appraisers generally have real estate or lending experience and, in most states, are licensed.
The appraisal protects both the borrower and the lender.By getting an accurate value of the equity in the home, it protects you from borrowing too much against the value of the home and risking getting into financial trouble. It likewise protects the membership of the credit union from lending you too much against the value of the home.
How to Calculate the Potential Equity in Your Home
Subtract the outstanding balance on your mortgage from 75 percent of the value of the home to approximate your potential line of credit or home loan amount.
For Example: A home appraises for $300,000. The owner still owes $150,000 on the mortgage.
Appraised value of home
Percentage of appraised value
Less balance owed on mortgage
Potential line of credit
What Are Our Specific Requirements for HELOCs?
For Home Equity requests up to $250,000 an automated valuation can be used. For requests up to $250,000 with a Combined Loan to Value (CLTV) greater than 75%, a Property Condition Report (PCR) will also be required.
For amounts in excess of $250,000, a full appraisal must be completed.
Hanscom FCU's 3-in-1 Home Equity Advantage Plan combines the convenience of an equity line of credit with options for fixed-rate advances and a credit card. There are no application fees, no minimum draw requirements, and no closing costs. But note that if you terminate your line within the first 24 months after closing, you will be responsible for closing costs.
Get Expert Guidance
Our home equity and mortgage experts are happy to answer your questions and help you understand your available options. We understand your unique financial needs and have the tools and expertise to help you achieve your goals. Let our dedicated home equity team find the perfect solution to make your financial dreams a reality.
Is There a Prepayment Penalty on a Home Equity Line of Credit?
First thing’s first: what is a prepayment penalty? It is a provision of your contract with a lender that states that in the event you pay off the loan entirely at a point prior to the final maturity date, you will pay a penalty. Penalties can be expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest.
Usually, prepayment penalties decline or disappear with the passage of time. Seldom do they apply after the fifth year.
Are There Prepayment Penalty Specifics?
The specifics of a prepayment penalty vary from one lender to another. One type of prepayment penalty is referred to as a soft prepay. This type of prepayment penalty is waived if the source of the original loan, such as a home, is sold. In this case, the penalty is only enforced if the loan is refinanced. This type of prepayment penalty is considered to be an incentive for customers who do not plan on refinancing, while still protecting the original lending institution.
For example: A common prepayment penalty is the following formula: six months worth of interest on 80% of the principal balance is owed at the time of prepayment. This means the prepayment penalty on a loan with an outstanding principal balance of 100,000 dollars and an interest rate of 5% would be approximately 2,000 dollars.
At Hanscom FCU, there are no prepayment penalties for home equity lines of credit. But as mentioned before, if you terminate a line within 24 months of closing, you will be responsible for all closing costs (even if you sell your house).
How Long Does It Take to Process a Home Equity Loan?
It can take 2 to 4 weeks from application to closing for a home equity loan or HELOC, depending on the complexity of the loan request.
Here's what happens during the home equity application process:
A loan underwriter will begin by reviewing your financial profile and comparing it to the loan requirements. The process will also include verification of financial information, collection of documents to satisfy conditions of commitment, and a valuation of the property.
Additional information may be requested, including:
- A copy of the recorded deed of the property
- The most current pay stub to verify income
- The last 2 years of tax returns with all schedules (if self employed)
- Verification of additional income if not shown on tax returns
- Trust agreement, if applicable
- A tax assessment
- Your mortgage statement, the most recent one showing the outstanding balance on your mortgage
- A list of payoffs for debt consolidation if consolidating debt
Having documentation organized and ready at the beginning of the application process can help simplify the process, which in turn can lead to a much faster turn-around time.
What Are Your Closing Costs on a Home Equity Loan?
Closing costs are part of the costs of setting up a HELOC. They're similar in nature to the closing costs you pay when you get a mortgage. Closing costs can include such things as:
- A fee for property appraisal
- An application fee
- Attorney's fees
- Title search
- Mortgage preparation and filing fees (dependent on municipality)
- Property and title insurance
In some cases these fees can run between two and five percent of the loan.
Thus, closing costs on a $50,000 HELOC would be between $1,000 and $2,500 depending on your location, loan to value ratio, and local laws.
Even if these fees are waived on the condition that you keep your loan or line open for a specific amount of time, you should ask for an itemized list of closing costs when you establish a HELOC.
Learn more about available options for Home Equity Loans and Lines from Hanscom FCU today!
Others are reading: