Applying for a Equity Line of Credit?
by Mortgage Rates on Friday, October 8th, 2010 | 4 Comments
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$75,000…. That’s quite a rehab you’re doing. I flip houses and rarely need more than $25,000.
You sound like you’re dead set on running yourself into debt.
Variable rates is a REAL bad decision today. And adjustable rate mortgage in a few years is going to be through the roof due to inflation caused by the government spending money they don’t have. You’ll be sorry.
On an interest only line of credit you pay interest and can pay the principal when ever you want. Usually higher interest rages on an interest only line of credit.
You’re best off getting a fixed rate refi with low interest which you also can pay towards the principal whenever you want to pay if off quickly.
However, I would strongly suggest being a little more reasonable with the amount you want to drive yourself in a hole.
First, you will be limited to the amount you can borrow at 80% loan to value (if your house appraises at $100,000 you can borrow up to $80,000 [since you owe nothing]). Interest only loans mean that all you are required to pay is the interest charge – you are allowed to pay towards the principle which is a wise thing to do, since it lowers future interest.
As you point out, a variable interest rate can come back to bite you if interest rates go up quickly and steeply. However, fixed rates can also bite you if they are significantly higher than variable and you plan on paying the loan off relatively quickly (say within a year, maybe 2). There is no one good answer to this part of the equation.
The biggest thing to look for in any equity loan is whether you have to hold the loan for a period of time before paying it off. Many equity loans impose a penalty if you pay them off within the first year, but no penalty after that (you can always pay off the vast majority in say 11 months, make a minimal payment month 12 and then pay off in month 13 to avoid the penalty). These penalties are basically there to penalize the rate hopper who re-fi’s with every rate drop.
Head to your local bank and talk to a mortgage officer. Ask about their products and have them explain everything. Take all the literature home and read it.
In your situation, you may want to consider something that is a bit more stable than an equity line or HELOC. You could just refinance the property as a cash out home improvement. 30 year fixed rates are low and you would be locked in on the rate and not have to worry about it. No prepayment penalties make it easy to pay off as fast as you want. If you are confident you can pay it off in a shorter period of time, you can save around 1.5 percentage points by going with a 5 year adjustable rate mortgage. Rate is fixed for 5 years so if you can pay it back before it adjusts you would save thousands.
HELOCS are tied to the prime rate, and with inflation looming there is little doubt it will be going up soon. Look into a full refi of your property and weigh the risk versus reward of a 30 year fixed versus a short term ARM.
You might be able to get a home improvement loan. I don’t know how common these are anymore, because my department does only one kind of loan. I don’t know what they do in other areas.
A home improvement loan will add the cost of the improvement to the value of the home to figure the loan to value ratio. You have to have a real contract from a real contractor.
A home equity line of credit is good if you will need the funds in fits and spurts. If you were finishing the basement, and would need to pay various contracts over a few months time period, this is a good option, if you can control yourself. If you make the minimum payment, you will almost certainly have an outstanding balance at the end of your term. You then have a second term to pay what’s left without having access to the funds. We would let you refinance it, but I don’t know if they still do that. You can pay as much as you want, but be sure to take note of any prepayment penalties. We let you pay it off completely, but not close it. If you closed it in the first 3 years, there was a penalty. It could be zero balance, and that was fine, but not closed.
If a home improvement loan isn’t available and you don’t trust yourself with a line of credit (I learned my lesson the hard way but with a much smaller personal line of credit), then a home equity loan or a cash out first might be a better option for you. Since you don’t have a mortgage now, I would go with a regular old cash out refi (we call it that whether you have a mortgage now or not…it’s a purchase loan or a refi, no other options). Get yourself a nice fixed rate 15 or 30 year loan, and pay if off as fast as you can. Most fixed rate loans don’t have prepayment penalties.