What You Need to Know About a Home Equity Line of Credit

Home Equity - Angel BronsgeestOne of the many benefits of home ownership is the ability to take out home equity line of credit where you can literally borrow money – using your house as collateral.

Many people do this to help make repairs and upgrades to their home; pay for school or medical bills; pay off credit card debt – no matter what – a home equity line of credit can help a homeowner in multiple ways.  However, like any “loan” there are many factors to consider and lots of terms and possibly even fees you may never even thought of if you have never had one.

The good news is that the Federal Reserve Board puts out an e-brochure entitled, “What you Should Know About Home Equity Lines of Credit” to help home owners better understand what a home equity line of credit means and how it works.  First of all, the Federal Reserve wants home owners to know that a home equity loan is a “…form of revolving credit in which your home serves as collateral.”

This is usually how it works: Lenders “…set the credit limit on a home equity line by taking a percentage (say, 75%) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage.” For example, the e-brochure lists the following examples:

  • Appraised value of home $100,000; Percentage x 75%
  • Less balance owed on mortgage – $ 40,000
  • Potential line of credit $ 35,000

While these formulas are a starting point for any financier, a lender will also look at a home owner’s ability to repay the loan; credit score and other factors that will be taken into consideration.  Also the Federal Reserve says that many lenders will cap a homeowner’s ability to take out a home equity line of credit – for example a home owner may only have the first ten years of ownership to take advantage of such a loan.

Understanding the HELOC

HELOC - Angel BronsgeestThe Federal Reserve says that there may be some limitations on how an owner actually uses a home equity line of credit, for example, “Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) or keep a minimum amount outstanding. Some plans may also require that you take an initial advance when the line is set up,” according to the Fed.

The Fed also reports that once you are approved for a home equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. For instance you will be able to use special checks or credit cards to use the monies (or draw on the line of credit).

However, the Federal Reserve warns that if a home owner wants to apply for a home equity line of credit, to look at several plans – never settle for the first estimate and to read each proposal very carefully “…and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs of establishing the plan.”

Also – like applying for an actual mortgage, there are many costs when trying to set up a home equity line of credit and the Federal Reserve lists out the following the watch out for so you know exactly what you are getting into:

  • A fee for a property appraisal to estimate the value of your home;
  • An application fee, which may not be refunded if you are turned down for credit 

Once you get the loan, you may also be charged every time you make a transaction and there may also be annual membership fees as well once you are given the home equity line of charges for the actual plan.

For more information on learning about a home equity line of credit, please go to http://files.consumerfinance.gov/f/201204_CFPB_HELOC-brochure.pdf.

Questions to Ask a Home Inspector

Home Inspection - Angel BronsgeestWhether you are selling or buying a home or even having it appraised for a loan, having an authorized home inspector is often mandatory.

Experienced home inspectors can look at a house and may find elements that need to fixed – and that can also affect the value of the property  depending on the results of an inspector’s report.

“While it may be disappointing to know that you may have to make repairs – in the long run, knowing this could expand the value of your property,” explains Shawn Watkins, founder of Investors Workshops in Orange County, California.  According to the U.S. Department of Housing and Urban Development or HUD, asking the right questions of your home inspector is of paramount importance.  Many people get nervous when an inspector inspects their home; HUD recommends the following questions to improve the overall experience:

1.       What does the inspection cover? How long will the report take?

According to HUD you want to make sure the inspector is complying with state laws as well as working “…with a well-recognized standard of practice and code of ethics.”

Once you determine that, you can ask questions such as “what will the inspector cover” as well as how it will take to get a complete report detailing your property’s condition.

2.       Inspector’s Experience

HUD advises people not to be shy and ask upfront for an inspector’s credentials and experience. Make sure the inspector has the right type of experience – whether for a home or a commercial property.  ”Ask about their educational background, associations and any training they have had as well as for references,” says Shawn Watkins.

3.       Will the inspector or inspector associations provide repair work?

If applicable and repairs are need to be done, then ask if the inspector will help with any repairs.  Some rules in various states might forbid an inspector or the association from doing this – so ask upfront.  It could save time and money.

4.       How long will take and how much does it cost?

HUD says the average on-site inspection for a single family home is two to three hours and cost generally is in the range of $300 – $500.

5.       Can I attend the inspection?

HUD suggests you inspect the home or property with the inspector as it can be a valuable opportunity.  Any inspector who is against that should raise a “red flag” according to HUD.

Home Prices Continue to Rise According to Case-Shiller

Real Estate - Angel BronsgeestWith data through February 2013, S&P/Case-Shiller Home Price Indices, a leading barometer of United States home prices tracking the value of single-family housing within the United States, showed average home prices increased 8.6% and 9.3% for the ten- and twenty-city composites in the 12 month period ending in February 2013.

Each of the 20 cities covered by the indices posted year-over-year increases for at least two consecutive months.  The data showed 16 of the 20 cities reporting annual growth rates rising from the last month, although Detroit, Miami, Minneapolis and Phoenix saw a very small annual deceleration of between -0.1 to -0.4 percentage points.  Phoenix continued its strong rebound with a remarkable year-over-year return of +23.0% while Atlanta and Dallas reported their highest annual growth rates in the history of the S&P/Case-Shiller Home Price Indices since 1992 and 2001, respectively.

“The numbers are very strong and the composite indices are recording their highest annual growth rates  in almost seven years,” according to Shawn Watkins, founder of Investors Workshops, a popular real estate investment networking group located in Orange County, California.  “Phoenix, San Francisco, Las Vegas and Atlanta all saw very impressive year over year price increases.”

Atlanta, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, Phoenix, San Diego, San Francisco and Tampa all reported double-digit year-over-year price increases.  “Despite some recent economic numbers that suggest the recovery is stalling or the rebounding real estate market may be due for a pause, investors are optimistic by the latest S&P/Case-Shiller report,” explains Shawn Watkins.