What Is A Home Equity Line Of Credit?
Do you have enough equity in your home to cash out and use it to increase your overall wealth? If you do, be forewarned that this is both an opportunity and a temptation that you could potentially misuse to your financial detriment.
A home equity line of credit or HELOC is a line of credit secured by your real estate. Rather than advancing the full sum of the loan, like a conventional or FHS loan, the lender sets a term and a limit, and you only take out the cash you want to use, up to that limit and within a period typically limited to between 5 and 25 years. HELOCs are home loans that require you to qualify in the same manner as other loans secured by your real estate, and defaulting on your payments could ultimately result in a foreclosure.
The most prudent uses of HELOCs are those big-ticket life-changing items like education and home improvement. This loan format suits these purposes well because of the flexibility; you only borrow as much against your equity as your expenditures mount. Since you are taking away from the stake that you hold in your home, you should only invest it either in bettering yourself or raising the market value of your property.
Mistakes That Homeowners Make With Home Equity Lines Of Credit
Trading in your equity to use for retail purchases or transient experiences is not an efficient financial strategy for the long-term. Case in point, when property values dipped significantly in 2007-2008, overuse of this type of financing for personal spending caused many homeowners to discover that their secured debts were greater than their home values.
In extraordinary circumstances your HELOC could be reduced by a nervous lender before the end of the term and before you can utilize it, which is what happened precisely as the real estate market crumbled in 2008; the banks revoked previously secured lines of credit in response to falling levels of homeowner equity. This drastic pullback was a result of the economic conditions of that era and a drastic measure.
Making Judgment Calls About Opportunities
There are alternatives to HELOCs that might better suit many homeowner circumstances. If you have a large proportion of equity, say fifty percent of the value of your home or more it might prove to be less expensive and simpler to refinance or take a conventional second home loan and take out the equity as a lump sum. However, there is no point in paying interest on cash that you do not intend to put to use immediately. Scooping out the equity that you have accrued in your home with a HELOC is best used as to trade for higher value elsewhere.
As a borrower, you might consider that once your line of credit is exhausted you may then decide to refinance. As the last decade has shown, your home value can go down as well as up. As a sensible homeowner, you should always allow for changes in fortune. However using a HELOC in the short-term to advance your education, career prospects and enhancing your property value are likely to be wise choices in the long-term as well.
As A Borrower, Either Millennial, Gen-Xer or Baby-Boomer Be
There are three distinct stages in a homeowner’s life. Let’s call them Millennial, Gen-X, and Baby-boomer, and while these terms imply distinct generations you can think of them as a series of financial stages that lead one to another, ascending the ladder of wealth.
Arguably, homeownership proceeds in stages because it is all about building and managing wealth; wealth itself is about having the lifestyle you have earned from the accumulated rewards of hard work. In the United States of America, owning your home is still one of the most significant factors associated with financial independence and membership in the middle class.
Financing for The Millennial Generation
If you are at the leading edge of the millennial generation, you are likely to be finished with school and starting to build a career. Now that you have gotten the travel bug out of your system paid down the majority of your student loans, and your career is on track, you might start to look around and get a home of your own.
As a person with just starting out, you might wonder if you are better off renting or buying. Once you decide that ownership is the right choice, you will have to start taking your credit history seriously and make an effort to get qualified for your first home loan.
Fortunately, first-time homeowners are reasonably well served by programs intended to get you into your first home. If you don’t have the savings to make a deposit of twenty percent or more, an FHA loan will facilitate making a small down payment, but that will add costs to your borrowing, this is an institution that has helped generations of Americans buy their first homes. If you are a veteran of the United States military, you might qualify for a Veterans Administration loan with even more generous terms.
Mid-life Gen-X Financing Options
You have bought that first home; you have paid down the loan balance and maybe the house of condominium is looking a little too small now, you have a career that is expanding and a two-income home. If you made it through the last decade with your assets intact you are in a good position to move up, you might decide to move up to a luxury home in an exclusive neighborhood.
With a low level of debt relative to the equity you hold in your assets, you can qualify for a jumbo loan unrestricted by the limits imposed on conforming loans, loans that fall within the limits set by Federal regulators on mortgages to conform to FHA and other government-backed lending programs.
Once your big move is behind you, maybe it is time to start expanding your assets. Do you dream of buying a vacation home or a rental property as an investment? Buying a second home or a rental unit could be a convenient and enjoyable way to increase your wealth.
Baby-Boomer Asset Consolidation Financing
You are in the stage of life when you want to consolidate your assets and downsize and focus in preparation for retirement. You may be wondering about how to get more out of your investment properties, reinvesting your gains or just converting to cash. These are questions that you need to work with your financial advisors and your family. Borrowing against your assets may not be the best choice if you have built up a large nest egg. However, holding a moderate level of debt could be financially efficient if you can take advantage of the tax deductions relating to interest.
All three stages have variations and creative possibilities and if you have a plan you can make each of the first two stages flow on to the third. Real estate finance still offers the American public the opportunity of ownership and advancement; it can bring a more comfortable and exciting lifestyle for those who are motivated to take advantage of it.
Dreaming The Dream
Ironically the key to building your own home from scratch is having the right professional support to put the whole process together and to ensure that the process goes smoothly from start to finish.
The thought of building your own home is extremely appealing to homeowners. If you could live in a unique house that was designed to your exact personal requirements, why would you not? Who would not want that? It is a real aspirational dream to start from scratch and come up with a house unlike any other.
Building your own home is an epic challenge because of the costs and complexities involved. But after it is completed, a successfully self-built home that stands out with charm and character is likely to become a landmark and icon of the community in future decades. This is also because the owner made their mark on society prior to construction.
Listing The Build Your Own Home Resources
As always, real estate and home ownership is about location. So the first element of the project will always be the finding of a suitable plot of land. If you already have that then you have made a significant first step to committing to a long and elaborate journey.
Your land will need to have the right permissions to construct the type of building that you want. This process could be straightforward or frustratingly difficult depending on how inline your plans are with the surrounding properties and the community in which it is situated.
Bring In Professionals
You will start when you hire an architect or select a published building design that suits your needs. An architect can do much to help you organize the plan and will come up with a unique design for your site and your lifestyle. Many construction companies have off-the-shelf plans ready to go. The advantage here is that they will do the work and already have the bugs worked out. So, it could be a smoother ride through the process.
You will also need to have a plan for completing the project. This is not a design for your home but a roadmap to get through the process of doing all of the work to make it happen. This is critical because there is a sequence of events from clearing the land to connecting the utilities.
On a related note, you will need to decide if you are going to employ a builder to manage and supervise the project or if you are going to act as show-runner and manage the build yourself. Even if you do choose to self-build you will likely need to consult with a builder to make sure the details come out right.
The combinations and permutations of how you go about building your own home are almost limitless. Some of the things you need to be aware of are the steps in the project plan and follow how progress is going in relation to the plan. One of the most important issues you should be concerned with is costing. Even small cost overruns can add up over the life of a project. An alternative would be to work with a builder that provides a turnkey solution.
Building your own home can be a fantastic adventure or a difficult long, drawn-out process. It is not for everybody. Most home seekers will be satisfied with the new homes offered by developers or the many choices of the existing home sales market.
If you decide to go the route of building your own home make certain that you do your research and find qualified professionals to support your objectives. If you get it right you will have a unique and remarkable home that is unlike any other in your neighborhood.
It is an exciting time when you move in with a partner, one that should be the epitome of happiness. However, organizing cohabitation is more complicated in practice, especially if either one of you already owns the home and makes payments on a home loan. The question of whether you should refinance is a part of the bigger question about how you will share ownership and financial responsibilities in general.
The Hazards Of Taking Turns
Taking turns in paying for life’s necessities in cohabitation leads to two parts of one problem: One or both partners soon start to keep a tally of who has paid for what. The solution for this is creating one shared bank account from which all costs of living and shared expenses come with both partners making a predetermined monthly contribution based on a budget that you work out and review together. Like your bank account, you will find that sharing the home you occupy is a tricky proposition, dependent on your circumstances and your state’s real estate laws on shared ownership.
Cohabiting As Homeowners
When you commit to co-ownership, you need to have a clear understanding of each other’s financial position going into the relationship. Do you know your partner’s current credit situation? Deciding whether you should refinance your home with your partner comes as part of the process of deciding how you should share everything. It is something to settle before you start making final choices.
So, what do you do when one partner owns the home already? If the other can afford to match assets and equity and borrowing ability, then the simplest solution might be to refinance as equal partners, both bringing cash and financial clout to the shared home.
If there is an imbalance in assets, then it becomes more complicated and yet in the eyes of the law, both partners might be entitled to an equal share of the property. The solution could be a cohabitation agreement, very much like a wedding prenuptial agreement, a contract that declares the assets brought to the partnership by each side and which return to each partner, should the relationship end.
Getting On With Your Lives Together
Real estate is a concept that is defined very clearly in the laws of the land, and each state has its particular histories legal precedents and legislation. The more closely you study the subject, the more complicated it becomes and it has become a specialization in the law that captures entire careers and specialized law firms.
As unromantic as it might seem, getting legal advice before you commit to moving in together is a prudent course of action. However, homeownership is a part of life, and domestic partnerships are a reflection of legal ones. If you can get past the legal formalities and settle in, as many couples do, you can have the domestic bliss you are seeking with all the comforts of owning your home.
Americans who have actively served their country in all branches of the military and having left the service with anything other than a dishonorable discharge have access to a wide range of benefits from the Department of Veterans Affairs. Under the Veterans Administration (VA) this includes assistance in purchasing a home.
Great Terms On Home Loans For Veterans
The VA does not lend money for home purchase but instead provides a loan guaranty to qualifying veterans to buy homes on very affordable terms. The VA loan guaranty program was instituted as the end of WWII approached, and the agency was very aware of the coming waves of men and women returning to civilian life. The concept was to enable returning veterans to settle and have a home and a part in the American Dream, in recognition of the fact that they had risked sacrificing their lives on behalf of the nation.
What has evolved over the years is an excellent program that allows qualifying vets to buy homes without down payments. This program is a generous benefit but in practice, it suffers from a touch of bureaucracy and being poorly understood by some real estate professionals.
VA Loans Sometimes Cause Confusion
Lenders and realtors sometimes shy away from VA because they do not have enough information or experience with it in practice. In unsubsidized conventional lending, the borrower contributes a down payment of twenty percent or more. The VA entitlement subsidizes insurance on the portion the financing that would be covered by the down payment; this can be confusing to inexperienced lenders and agents.
The VA Loan Guaranty program sets no limit on lending, but it caps the deposit liability. VA Loans do not have a conforming loan limit per se, but for a no-down-payment VA loan the de facto lending limit is the same as Fannie Mae and Freddie Mac limits by county, but by adding cash as down payment you can increase the size of the loan. In all cases, you still have to qualify based on your credit and income just like conventional and FHA loans.
Appraisals for VA have a reputation for being rigorous, slow and conservative (meaning it might come in low). A low appraisal might prevent the sale unless the buyer pays the difference, which undermines the whole point of “no down payment.”
VA financing requires that an eligible property is within U.S. territories and is a completed structure, either new built or existing, not undeveloped land. If the home is a condominium, the complex also has to be approved for VA lending, which is not a given.
Something For Your Service
The potential roadblocks you might encounter are professionals reluctant to work with a VA loan, harsh appraisals and the need for condo approval. But these are not insurmountable challenges; a little persistence will go a long way when you are attempting to buy a home with a VA loan and no down payment. Approach the process as if you are hunting for a bargain and when you have your new home, you will find it is a bargain that you earned with your service.
If The Finance Deal Sounds Too Good, It Probably Is
Buying a home is a big undertaking and one that has implications for the decisions that you make today that could impact your wealth and lifestyle for years to come. You need to be extremely careful to get the financing right so that you can reap the benefits of a smart choice.
The financial services industry is gigantic and diverse; it accounted for $1.26 trillion worth of sales in 2014. While the majority of companies provide excellent service, there are a few that are unscrupulous, and in between there are those companies that maybe just push the hard-sell tactics too far. So let’s point out some of the selling tactics to look out for and take as signals to avoid particular real estate lending offers.
Watch Out For Deceptive Wording
“Low Fixed Rates” that are just ARM introductory periods – If the blurb says something along the lines of, “low fixed rate for the first five years,” that is a sure sign that the loan is an adjustable rate mortgage or ARM. While an adjustable rates are not necessarily bad, they can be worded deceptively and potentially leave the borrowers open to the risks associated with the terms and uncertainties at the time that the adjustment takes place.
“A great deal because it’s government backed!” – Really? Government programs, for example, Freddie Mac and Fannie Mae, “back” most loans that meet the conforming criteria by purchasing them as investments; such claims are misleading because they overstate the significance of that backing.
Refinancing Offers To Avoid
Unsolicited offers in return for information – In refinancing a home loan, it is always a safer policy to take the initiative. Do not respond to unsolicited offers that promise to find a great deal if you “just fill out a form.” The risk of getting scammed is just too high. The information that they ask you to give is exactly the type of information that identity thieves crave; you are better off just assuming that unsolicited refinance offers are scams.
Never pay fees up front – There is no good reason to pay a lender anything before closing. If they ask for payments up front, it is a sign that you need to go elsewhere for your refinance. Don’t do it, and don’t walk out, RUN!
Avoid prepayment penalties – How about your interest if you pay off the loan early? Who knows what will happen in the next five years? The pace of technological changes and politics are so volatile these days that you don’t want to be tied into some financial commitment, with a cash penalty as the only alternative. But this is what can happen with a home loan that has a prepayment penalty tying you in as part of the contract. Regardless of your present plans, always insist that your home loan has no prepayment penalties.
Information on what to avoid in real estate finance is not hard to find. A search of the Internet will return a list of the latest scams and scoundrels and how to avoid them. Researching the reviews of services on social sites, the Better Business Bureau and getting advice from trusted and disinterested parties is all part of the process of finding the right provider for your home loan.