Tapping your equity with a Home Equity Line of Credit

Jessica · Last edited by Jessica on Sat May 12, 2007 5:13 am

Saving your earnings in a bank or looking for something better? Think about ways of tapping your financial resources and you'll find that utilizing your home equity is often a viable option. Your home equity is the current value of your home minus the money you owe on a mortgage. And, a simple way to get the best out of your equity is to take a home equity line of credit, which is a kind of second mortgage.

Home equity of credit (HELOC) gives you the opportunity to support your financial needs using your home equity as a security for the loan. For buyers having no cash for down payment, the home equity line of credit seems to be a better option. With the line of credit, you never go beyond a certain credit limit, and placing a limit on the loan amount helps you to manage your debts better.

How a HELOC works

A home equity line of credit works like a revolving credit card with which you can withdraw cash up to a predetermined limit any time within the draw period. It's easy to access the funds in a HELOC. You can avail the credit by writing a check or charging a credit card or by using an ATM card against the credit line.

While you avail credit, you are required to make a minimum monthly payment covering only the interest. But you can also start paying off the principal so that your debts are cleared within a certain time period and you can again withdraw funds if the draw period isn't over.

Once the draw period ends, you can ask for a renewal of the same or else you can no longer access the cash once the draw period expires. The repayment period starts and your mortgage takes the form of an adjustable rate mortgage which requires you to pay off the loan amount in regular installments.

In most cases, you are allotted a draw period of 5 to 10 years, after which the repayment period carries on for 10 to 15 years. But there are lenders who offer helocs with no fixed terms for withdrawal and repayment of cash; you can carry on with the loan till you sell off the property.

Here's an example on how HELOC works

Suppose that you have a line of credit worth $10, 000. You borrow $6,000 in order to pay for kitchen purposes. You owe $6,000 which you have already taken and the remaining credit available is $4,000. Now if you pay back at least $2,000, you still owe $4,000 and you have $6,000 ($4,000 + $2,000 = $6,000) in available credit.

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carnahandavid · Joined: 21 Dec 2006 Posts: 239 58.40 Dollars($)

Let me add some information about how the interest is charged on a HELOC.

Balance on this type of loan can change on a daily basis as the borrower draws from the credit line and makes repayments. So interest on a home equity line of credit is calculated daily instead of being calculated monthly. Let me give an example of how it works.

Suppose on an frm of 6%, interest is calculated every month as .06 (6% or 6/100 = .06) divided by 12 (months) which comes out to .005, this is multiplied with principal balance amount as on last day of previous month. If the balance amount was $50,000, then interest to be paid that month would be $250.

While for a HELOC with 6% rate, interest on a daily basis is calculated as, .06 divided by 365 = .000164, this is then multiplied with average daily balance for that month. And if the balance happened to be $50,000, then daily interest will be $8.2 and for the month it will be $246 while for a 31 day month, it will come out to $254.2 .

David

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what disclosures lender is required to make for a home equity plan?

blue · Posted: Wed May 23, 2007 7:33 pm Post subject:

Hi Spero,

Welcome to Mortgagefit discussion board.

As per Truth in Lending Act, lender is required to make disclosure regarding all the important terms & costs of the home equity plans they offer. Such as the APR, payment terms, miscellaneous charges and details of variable rate feature for their loans.

Additionally lender cannot charge you any fee until you have been provided all these disclosures. These disclosures are provided when a person is given the application form. Some additional disclosures are provided when the home equity plan is opened.

TILA also states that lender has to return all fees charged if any of the terms of the plan change (except for the variable rate feature) before the plan is opened and because of which you decide not to open the plan.

Do let me know if you have any other questions.

Thanks
Blue

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what are participation & transaction fees for helocs

colin · Posted: Mon May 28, 2007 4:50 pm Post subject:

Hi Cantina,

Welcome to Mortgagefit forum.

Participation fee is what is charged annually to have the line of credit available. Generally it is charged regardless of you are using the credit line or not.

And the transaction fee is an amount charged every time a borrower draws on his credit line.

Colin

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I am in Colorado and have a second house with a heloc. I am thinking of a foreclosure with heloc balance of $50K, or a short sale – which is my best option? Would the lender forgive the balance on either of the processes. Would they go after my first mortgage and home after I tell them I 'll go for foreclose or short sale? The home is the only one I have and would surely not like to lose it.

larry · Joined: 27 Jun 2007 Posts: 2598 349.39 Dollars($)

Hi Jack_ben,

Welcome in this forum.

You should avoid foreclosure as foreclosure will affect your credit. It will drop your credit score for 200 to 300 points and will be shown in your credit report for 10 years. So foreclosure should be your last option. I think you should first talk to your lender and see if there are any options available for you to avoid foreclosure.

“which is my best option?” Between foreclosure and short sale, short sale is better as it affects your credit less than foreclosure. Short sale will drop 80 to 100 points.

“Would the lender forgive the balance on either of the processes. Would they go after my first mortgage and home after I tell them I 'll go for foreclose or short sale?”
I think they will not forgive the balance as you have another property. Only if you cannot pay the balance in anyway, then they may forgive it but in that case, they will send 1099 C form to the IRS and you have to pay tax on that forgiven amount.

So, talk to your lender as soon as possible. And try to go for deed in lieu of foreclosure if it is possible as in that case your balance amount will be forgiven. Or you can try out some other options also if possible.

Best of luck,
Larry

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I am very thankful for your website. It is very informative. Keep up the good work.

jenkin7 · Joined: 04 Jun 2007 Posts: 880 131.00 Dollars($)

Hello Ravello,

Thanks for your appreciation.

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My spec house would not sell and forclosed 2 months ago. The line of credit against( used to make the morgage payments untill the house sold) is about 35k and they want the money. I was told by a lawyer in the state of the forclosure that the line would go as well. Is this not the case?

jameshogg

Hi Noah,

Welcome to forums.

You mean the lender wants the entire 35K which was unpaid and because of which they foreclosed? How is this possible? Was the lender able to recover the unpaid debt entirely through the foreclosure?

In case, the lender hasn't been able to recover the unpaid debt in full, he may ask you for the deficit amount and perhaps that's the reason they're now asking for money. Just have a clear talk with the lender. I think somehere there's a kind of communication gap. Oh, by the way, is it that the first mortgage debt could be recovered but not the line of credit? Then that's the reason they're asking for 35K. What you can do now is, request them to charge-off or cancel the debt if you are not able to pay off the line of credit.

Thanks

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I've bought a house for $120,000 and then I took out a heloc worth $30,000. now if I sell the house for $2,20,000, do I owe capital gains taxes on $120,000 or on 70,000?

jenkin7 · Joined: 04 Jun 2007 Posts: 880 131.00 Dollars($)

Hello Adrian,

You have to pay the capital gains tax on the difference between the original amount which you paid for purchasing the property and what you receive when you are selling the property. So, in your case the difference is $100,000.

But if this is your primary residence, you may make up to $250,000 profit without paying the taxes if you are a single owner and twice the amount if you are married and filing the returns jointly. In that case you have to occupy the residence for a minimum of 2 years out of the past 5 years prior to the sale.

For further information on capital gains exemption, you may look here http://www.mortgagefit.com/budgeting-finance/capitalgainsexemption.htm l

lisascherzer · Joined: 04 Jan 2008 Posts: 575 66.11 Dollars($)

Hi Adrian,

Capital gains is based on the difference between what you paid for the home and the cost of iimprovements and the sale of the home. It is not based on what you have borrowed against the home. So to calculate capital gains, take the sales prices and subract what you paid for it and all the improvements you have done (actual cost) to determine capital gains tax. If you have lived in the property for 2 out of the last 5 years then you should be exempt from this tax up to 250K if single and 500K for a married couple.

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