Equity loans, credit, and scams
Currently the economy has shown signs which have caused the Federal Reserve to cut the interest rates. This may be the equivalent of speaking Greek to some. The point is, this move means currently, it is less expensive to borrow and there is less interest to earn on money being saved in the bank or with bank products. At times like this some people who are homeowners, they begin to look into the options they may have to get capital at a more affordable price. This can include more favorable terms on their mortgage or they can look into obtaining cash from the value of their home for some personal reason. There are several options around to solve these personal issues and those include home equity loans, home equity lines of credit, a cash out refinance, reverse mortgages, and equity partnerships. Not all of these options are the same and offer a sense of security. It is important to research and learn your options before making a decision.
Home equity loans are a standard loan that the home owner/mortgage holder is able to take against the equity in the home. Equity is the difference between the home's market value and the balance of the mortgage. This can be thought of the cash available if you were to sell your house at market value as of that day. This is why people say that your home is an asset because under some circumstances it can be used to provide cash for investments and other ventures. Back to the home equity loan, it is limited to a certain amount that can be borrowed at one time. So one does not have access to all of the equity because the bank needs to provide some sort of protection for itself. The market changes frequently and a market value can drop quite a bit and if the drop is rather steep it makes it less likely that the bank will get its money back. The home equity loan is one single loan, with a set repayment term, and a set annual percentage rate. The percentage rate is typically greater than that on the actual mortgage, but that depends on the market and the time of the mortgage and home equity loan. For example, person A has $50,000 in equity in their home. He/She is allowed to borrow 80% of their equity (50,000 * .8 = 40,000) which is $40,000. Person A chooses to borrow the whole $40,000 and based on their credit they have a 3.5% APR over 30 years. This is a separate payment made to a new lender who is separate from the mortgage servicing company, or it can be under the same company all that's important to remember is there is an additional payment due each month to fulfill the terms of the new loan. Also depending on the lender their may also be closing costs which will make it more expensive to borrow those funds.
A home equity line of credit (heloc) is quite different but still based on the equity in one's home. The line of credit is just that an established line of credit up to a certain percentage of the equity on one's home. The main difference is that the line of credit does not result in a one time transaction and payment terms. The heloc can be multiple withdrawals or transactions from the home's equity. Many experts liken a heloc to a credit card so others can understand the difference when compared to a home equity loan. The heloc can have a variable apr and the costs can increase through the duration of the outstanding balance. This can be thought to be a bit more flexible but it still must be paid off by a predetermined future date and borrowing is only allowed for a specific amount of time. Just like a home equity loan, the heloc terms are based on the home owner's creditworthiness, lender, and amount of equity in the property. This too results in a separate additional payment due each month until the balance is paid off.
There is another option called a cash out refinance. This is when the home owner refinances their debt on the home for an amount greater than the current balance. Traditionally, people refinance their loans at about the same amount to have lower payments because they extend the life of the loan or because the interest rates drops making it more favorable to refinance under the lower apr. The cash out refinance is similar except it increases the principal of the loan up to the new market value of the home. The borrower takes on a new larger loan. The difference between the old loan and new loan is paid to the borrower in cash(after all closing costs are satisfied). It's important to be clear about the terms and details when taking on this option because you just increased your burden as one single loan. A lot of people took advantage of this option before the recession in 2008. When the markets dropped and home values crashed many people were left upside down on their home loans. They owed so much more on the home than what it was worth that even after being able to sell the homes there'd still be a balance owed. This put people in situations which had many people walking away from their homes altogether. This and adjustable rate mortgages. The point is this is one loan, results in one new payment and a new set of terms.
A reverse mortgage is for an older population. It is typically for those who are older than 60. It is for borrowers who are at least 62 and it is marketed as a way for that population to access money for retirement from their home. These loans are different because they do not require payments while the borrower is still alive and living in the home. So it gives the appearance of one receiving a paycheck or lump sum payment to take care of one's needs. The big catch is that the loan is due to be repaid upon the death or relocation of the borrower. Once the borrower dies, it is now the responsibility of the estate to settle the loan. This can be very hard for loved ones to deal with after the passing of a loved one. The borrower should consider if the money makes up for the loss advantage(s) which could potentially pass down to one's offspring? That's a really important question to ask and answer before deciding on such an action. Bankrate has a quick read with more details about the reverse mortgages at:
Moving on to another questionable form of accessing money from the equity in one's home. There are equity partners/lenders which exist to "help" people who are not necessarily well qualified to access money from their homes because they have bad credit. These are lenders who look to offer people the "favorable" terms where they can lease their home from company A who purchases the home and creates a sale-leaseback agreement. This means that company A becomes the new home owner of said property. Company does not charge monthly rent payments to the original home owner for the term of agreement. At the end of the agreement the original homeowner has to pay company A the total amount including the suspended rent payments. If the original homeowner does not have the money the home is sold by company A and any excess over their costs is then given to the original homeowner. This is a very problematic option because the home is no longer in the homeowner's possession. This can be a problem because once the home leaves the possession of the original homeowner this becomes dangerous territory. This is because if the homeowner needs money and is not able to get it due to credit or other obstacles, then this sounds like a great blessing/opportunity. Thinking things through, the homeowner may very well end up in a worse situation in the future because they now have a countdown and added pressure to get their home back. Once the home switches ownership then it is no longer an asset to the original homeowner. It can no longer be a potential asset to pass on as inheritance. It is no longer a home, it becomes a rental space.
In this time of favorable lending options it is important to be mindful and knowledgeable of options available. It is always important to be clear of the terms of any agreement in which one enters. Those which involve transfer of one's assets, those which will make one responsible for new debts, and any other obligations. There are always resources available when one may need to find and access funds. Make sure to get the most beneficial and advantageous options which are available based on circumstance. Do NOT sign your house away to anyone, if that's the case you might be better off looking to sell the home outright and maybe downsize or change the current living situation.
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