What You Don’t Know About The Equity Loan Can Hurt You 

Wells Fargo is one of the leading providers of home equity financing in the United States, however with that being said they will still hit you like a mack truck if you don’t know the ins and outs of home equity loans.

Let’s cover some details most home owners miss about the home equity loans and lines of credit concept.

Home Equity Line Of Credit

The home equity line of credit (HELOC) is a variable interest rate and your payment is typically an interest only payment based on the amount used, not the lump sum amount. Also, you’ll find that there is a minimum draw required when getting most home equity loans, meaning you must withdrawal a certain amount up front. That’s something most people miss — getting sucked in by the low payment and not knowing the mandatory withdrawal after opening the account.

 Home Equity Loan

The home equity loan (HELOAN) is a fixed interest rate and is taken in a lump sum of cash. Rates are higher on these types of loans because the index or base interest rate is derived from the current prime rate.

As of September 20, 2007 the prime rate was 7.75% so expect your rate to be near that, probably more.

Also, beware that if advertised rates are lower than the prime rate — there IS a catch which is typically a 6 month teaser rate. Watch out for rates that are lower than the advertised prime rate, read the fine print.

How To Get Approved

These days, with home values dropping significantly, your credit rating AND home value are key to approval.

In the past, combined loan to value limits (CLTV) were a little slack however with the mortgage lenders tightening their grip on guidelines they are now much more strict.

If you’re wondering what CLTV means, it’s really just the combined percentage of your first mortgage and your second mortgage compared to the total value of your home. For example, if you have a first mortgage at 80% of the value of your home and a second mortgage at 10% of the value of your home you have a CLTV of 90%. CLTV limits are a major factor when seeking approval for a home equity line of credit or home equity loan. Not many lenders are lending above the 85% to 90% limits — unless of course you have stellar credit and lots of reserves or cash available already.

When The Name Changes, Beware!

When you see lenders using new terms such as “smart-fit”, “easydraw”, etc. you know that the fine print will almost always be extensive. There are a lot of tricks a lender can do behind the home equity and line accounts for a second mortgage.

One of the smartest ways to manage your money is to borrow the max you can afford, invest in tax favored investment and USE your home equity to your advantage as opposed to losing money in the market when home values drop. Who cares if your homes value drops if you’ve already pulled out the cash and have it working for you.