Compare home equity line of credit rates

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I have a lot of friends who paid off their mortgages and loans as soon as they got the money, and have since vowed never to take another loan in their lives.

While this sentiment may bode well for those with extraordinary net worth, it overlooks the value that home equity lines of credit can bring to those with more ordinary means (normal people and even the simple rich). in their financial planning.

Home Equity Line of Credit Basics

Let’s take a look at the basics of home equity lines of credit first to understand what makes them attractive. First, home equity lines of credit are generally less expensive and more flexible than home equity loans. It is important to note that as a borrower you only borrow the amount you need, and therefore you only pay interest on the amount you need and withdraw. And, while the repayment schedule is therefore very flexible, the amortization schedule generally does not require repayment of the principal withdrawn before year 10. In other words, home equity lines of credit are loans to you. interest only for the first 10 years.

Typically, lenders lend between $ 200,000 and $ 500,000.

Key benefits for the rich

Since you only pay interest as you go and on what you take out in the first 10 years, the wealthy, especially the self-employed, can use a home equity line of credit to cover their expenses. daily. According to Janis Bronstein, vice president of FM Home Loans, a mortgage brokerage firm based in Hamptons, New York, home equity can equalize uneven spending and act as a bridge for other purposes. , such as home renovations or car purchases. If you qualify, you can even use a home equity line of credit to finance the purchase of another home while you’re trying to sell your current home. To do this, you must follow the debt-to-income ratio guidelines and down payment guidelines set by the new mortgagor.

The new mortgagor will base their eligibility calculations on the assumption that your line of credit is fully utilized.

Price and qualification

The price of a home equity line of credit varies from lender to lender. You can see the prices offered by some lenders here. In general, it is important to understand that the rate on a home equity loan is based on the prime rate (“prime”) which is the rate that commercial banks charge their most creditworthy customers. Most lenders add a line on top of the prime rate, and the home equity line, of course, depends on your credit score meeting certain parameters and the loan-to-value ratio of what you are financing.

When determining if you qualify for a home equity line of credit, lenders typically assume the prime interest rate increases 2% from the pricing date (or more) and look at your capacity. , depending on your cash flow, payable. repay the loan by amortizing the capital over a period of 20 years. They perform this stress test to make sure that you will have the capacity to stick to the loan even with fluctuations in the prime rate and a shorter repayment period that might be stated in the loan.

Some possible drawbacks

Ms. Bronstein also points out that while home equity loans are generally more flexible and cheaper than home equity loans and less expensive than credit cards, they come with risks and drawbacks.

A real risk in a home equity loan is that the repayment terms are tied to fluctuations in the prime lending rate, and can fluctuate significantly. The policy rate is more likely to rise than fall over the next several years as the Federal Reserve raises the federal funds rate.

Consumers should therefore also analyze whether this makes more sense than mortgage refinancing in cash. For example, with a current prime rate of 4.25%, the BestCashCow Mortgage Refinance Tables show a 30-year fixed rate of 3.75% as of the date of this posting. This rate and product may make more sense to a borrower who will hold the money for a long time. However, some borrowers who intend to conserve cash and attracted to the lower rates may still find home equity lines of credit to be the product of choice, as they can often be as high as 90% of the value. of the property against which they are paid. issued, and avoid the need for private mortgage insurance (PMI).

See the best home equity line of credit rates where you live here.


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