What Is Home Equity?
Home equity is the value of a home minus the mortgage debt and other encumbrances. Therefore, the longer a consumer has been making payments on a home, the greater the home equity accumulated. Home equity may be the best way to establish a substantial credit line or loan. A home equity loan is a fixed amount payable over a period of years, typically 5 or 10 years. A home equity line of credit is an amount that the consumer may borrow against by drawing “checks” up to the amount of the approved credit line. This home equity line of credit may not have a definite pay off date. Home equity allows a consumer to make a substantial investment. However, depleting your home equity has its risks.
Reasons For Borrowing Against Your Home Equity
Borrowing against home equity allows a consumer to get a loan or credit line for the following such reasons: • Major Purchase • Debt Consolidation • Home Improvements • Child’s Education A line of credit account is open for a period of time determined by agreement with the lender. When the account is closed it may be possible to re-negotiate with the lender to extend the life of the account or convert it to a fixed term loan. In addition to getting a credit line for a large expense, the interest paid on a home equity loan may be tax deductible for loans up to 100% of the home’s value. Consumers should check with a tax advisor, but this tax break may make the effective interest cost less than other kinds of credits. For many, a house is their most valuable possession. By borrowing against the equity, the consumer risks losing their home if they are unable to make payments.
Creditors Typically Look At The Following Factors:
• Stable job with longevity. • Stable place of living. • Is the consumer a home owner or do they rent. • Stable finances. • A history of timely payments on existing and previous loans or lines of credit. • Income sufficient to pay current debts. These factors determine a consumer’s credit worthiness. The more stable and substantial a consumer’s credit history, the more credit worthy they are.
What To Look For In A Home Equity Loan
Things to consider when shopping for a home equity loan: How much money is available to borrow on a home equity loan or credit line? Depending on individual credit history, some lenders may allow the borrowing of up to 85% of the appraised value of a home. Know the interest rate and whether or not it is a fixed or variable rate. If it is a variable rate know the index used and history of the index. Obtain a list of all the fees that will be charged in addition to the interest. Insist on such a list. Have a plan to repay the loan. Lenders may require payment only on the interest until the account closes or they may have a minimum monthly payment. Each individual should create a plan of how they intend to repay the loan. By looking at these and other factors, consumers will be able to better determine if a home equity loan is right for their needs.
Obtaining And Keeping A Favorable Credit Report
A consumer should start working on building good credit as soon as possible. The Fair Credit Reporting Act (CRA) permits derogatory information to stay on your report for seven years and any bankruptcies for up to ten years. Crime convictions will remain on a credit report permanently. It takes a long duration of good credit behavior to mend a credit report with significant derogatory information.
Borrowers Beware
While most businesses are reputable, there are some providers of home equity credit whose desire for profit is greater than their ethical obligation. Using hidden fees, high interest rates, repeated refinancing (commonly called “loan flipping”), and other tactics, a predatory lender can strip a consumer of the equity that may have taken them a lifetime to build. Predatory lenders often target minorities and the elderly because a large portion of these consumers' wealth is in their home equity.
Rod R. Blagojevich
D. Lorenzo Padron
Commissioner
Tips On How To Shop For A Home Equity Loan
Comparison-shop. Local newspapers typically list rates being offered by different lenders. Make sure to check out at least three (3) lenders, compare their interest rates and fees. Pay close attention to all fees. These fees may not be included in the annual percentage rate. Negotiate. Make lenders compete for your business. Let them know that you are shopping around. Force them to make the best deal for you. After you have found the best deal, make sure that you read all the financial papers carefully and that you understand the terms. This will ensure that you won't be charged with fees that you weren’t expecting. If at closing, the loan isn’t what you had agreed upon, don’t sign. Negotiate the changes to the agreed upon terms, or leave. Before going into any loan meeting, make sure that your credit report is accurate and up-to-date. Remember! You have three (3) days to cancel your home equity loan after you sign the contracts. When the three (3) days are over, you are bound to the loan and everything attached.
Do’s And Don’ts To Protect You From Dishonest Practices
DON’TS
• Don’t agree to a home equity loan if you can’t make the payments. • Don’t sign a document without reading it or if it has any blank spaces. • Don’t be pressured into any agreement. • Don’t be fooled by attractive promises that are not part of the written agreement. • Don’t give the deed to your property to anyone without first consulting an attorney. • Don’t deal with door-to-door salespersons or telephone solicitors offering to provide you a home equity loan.
Governor
ILLINOIS
OFFICE OF BANKS AND REAL ESTATE
DO’S
• Do make sure you understand the loan completely. If you don’t: ask. • Do check the references of your lenders. • Do shop around for the best deal. • Do get pre-loan advice from a credit counseling service. • Do make sure that you are capable of making all payments on a timely basis.
Home Equity Loans
Office of Banks and Real Estate 500 East Monroe Street Springfield, Illinois 62701 Phone: (217) 782-3000 Fax: (217) 524-5941 TDD: (217) 524-6644 310 S. Michigan Avenue, Suite 2130 Chicago, Illinois 60604 Phone: (312) 793-3000 Fax: (312) 793-7097 TDD: (312) 793-0291 Consumer Services Toll Free Hotline: 1-877-793-3470 www.obre.state.il.us
Printed by Authority of the State of Illinois IL 505-0560 July 2003