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Home Equity Lines Of Credit, Boom Or Bust?

Tuesday, June 21, 2016

Home equity lines of credit can be a boon or a bust for consumers depending on their understanding of leverage. Most consumers assume that a fixed-rate mortgage is their best choice when it may not be true at all. Home equity lines of credit can also be used in conjunction with a first mortgage to purchase a property. By obtaining a home equity line of credit with a new first mortgage, buyers may access the funds to increase their down payment and thus avoid the cost of mortgage insurance. Home equity lines of credit can be accessed by check as well as by credit card by either party; and, the non-borrowing party can be held responsible for paying it back. If too much is borrowed and cannot be paid back, the house may be lost.
Home Equity Lines Of Credit
Borrower is responsible for both homeowners and flood insurance. Borrowing from the equity in your home may be advantageous because (depending on how you use the money), the interest you pay on the 2nd mortgage loan may be tax deductible. Borrowers who have excellent credit scores may also find that status hurt when a home equity line is frozen. That is because when a lender suddenly caps a $50,000 line at $25,000, the borrower will appear to have tapped the entire amount of the loan, a factor that can reduce a person's credit score.

Lenders offer home equity lines of credit in several ways with either fixed or variable interest rates. Information on obtaining a home equity line of credit is available to you from many sources, including online lenders. Lenders may attempt to draw you in with a low introductory rate, may have offers of no-out-of-pocket-costs or even some form of premium. In such an arrangement, the lender absorbs the cost of originating the line, expecting that he'll recoup those costs over time as a result of the interest you'll pay. Lenders usually do not require that payments are made on the principal, but will always require monthly interest payments be made. The interest rate on the home equity lines of credit are usually at a rate at or above prime.

Interest on home equity loans or home equity lines of credit is already deductible, subject to certain limits. Taxpayers who claim the home equity deduction cannot deduct this interest under the student loan deduction. Interest only payments are the only payments due during the draw period. Interest-only and ARM mortgages were designed to make homes more affordable, but they also enabled people to live beyond their means. Yet every single person that took out one of these loans (and even I had a 7-year ARM at one point) knew that the piper would one day come calling.

Loans exceeding 80% of the appraised value of the home require private mortgage insurance. Amount of waived closing costs, as detailed on the Settlement Statement at closing, must be paid back to SCCU if the loan is paid off within the first 36 months from the first payment due date. Loan review performs a limited scope review of a minimum of 30 percent of all new loan originations. In addition, any loan identified as a problem credit by management during loan review is assigned to the Bank's loan "watch list," is subject to ongoing monitoring by the Bank's credit quality committee to ensure appropriate action is taken if deterioration occurs.

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