Safeguards And Protections For Helocs
What federal safeguards apply to HELOCs?
Under federal law, lenders must tell you:
- about the terms and costs of the line of credit in most cases when you get an application
- the APR and payment terms
- the charges by the creditor to open, use, or maintain the account, like an application fee, annual fee, or transaction fee
- the charges by other companies to open the line of credit, like an appraisal fee, fee to get a credit report, or attorneys fees
- about any variable-rate feature
Lenders must give you a brochure describing the general features of HELOCS.
If you decide not to take the HELOC because of a change in terms from what you expected, the lender must return all of the fees you paid.
Lenders also must give you three business days, including Saturdays, but not Sundays, to cancel a HELOC, which usually starts to run from when you opened the plan, or when you received all material disclosures, whichever occurs last:
- You may cancel the HELOC for any reason.
- To cancel, you must inform the lender in writing within the three-day period. Then the lender must cancel its security interest in your home and must also return fees you paid to open the plan.
- If the required notice and disclosures are not provided, you may have up to three years after opening the plan to rescind the HELOC.
- For more information, see The Three-Day Cancellation Rule.
How can I avoid possible pitfalls with a HELOC?
Tips Before You Get A Home Equity Line Of Credit
- Determine whether you need extra credit to achieve your goals or could you build and use savings instead
- If you decide you need credit, consider things like flexibility, fees, interest rates and terms and conditions
- Make a clear plan of how you’ll use the money you borrow
- Create a realistic budget for your projects
- Determine the credit limit you need
- Shop around and negotiate with different lenders
- Create a repayment schedule and stick to it
- What do they require for you to qualify
- Whats the best interest rate they can offer you
- How much notice will you be given before an interest rate increase
- What fees apply
Home Equity Loans: A Complete Guide
Home equity loans are a useful way to tap into the equity of your home to obtain funds when your assets are tied up in your property. Theyre generally offered at lower interest rates than other forms of consumer loans because they are secured by your home, just like your primary mortgage.
Read on to learn more about home equity loans and other ways to take advantage of your equityto decide if this loan option isright for you.
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How To Choose The Best Home Equity Option For You
Understand all of the costs involved
Regardless of which option you choose, make sure you understand all the costs involved with your loan or line of credit.
If its an adjustable-rate loan, do keep in mind that your monthly payments will fluctuate with interest rates. While mortgage rates remain low, your monthly payments will be low. However, those interest rates may start to go up at some point, which means your monthly payments will also increase.
Check whether you need to cover closing costs and if there are any additional fees. For instance, many banks agree to cover closing costs, with the caveat that if you pay off your loan in full earlier than expected in most cases, within three years some closing costs must be reimbursed. Other banks may also charge account annual fees and processing fees.
Get professional advice before making a decision
While the idea of having ready access to $50k or even $100k might be tempting, you need to make sure its the right move, especially during times of financial uncertainty. If youre unsure how to proceed or which option is best for you, seek an unbiased expert opinion.
What credit score do you need to get a home equity loan?
While most lenders require a minimum credit score of 620 for home equity loans, some may require a higher score. As with most loans, the higher your credit score, the lower your interest rate. A credit score of 740 or higher will get you the best rates.
How much can you borrow with a home equity loan?
Qualify For A Home Equity Line Of Credit
You only have to qualify and be approved for a home equity line of credit once. After youre approved, you can access your home equity line of credit whenever you want.
- a minimum down payment or equity of 20%, or
- a minimum down payment or equity of 35% if you want to use a stand-alone home equity line of credit as a substitute for a mortgage
Before approving you for a home equity line of credit, your lender will also require that you have:
- an acceptable credit score
- proof of sufficient and stable income
- an acceptable level of debt compared to your income
To qualify for a home equity line of credit at a bank, you will need to pass a stress test. You will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your contract.
You need to pass this stress test even if you dont need mortgage loan insurance.
The bank must use the higher interest rate of either:
- the interest rate you negotiate with your lender plus 2%
If you own your home and want to use the equity in your home to get a home equity line of credit, youll also be required to:
- provide proof you own your home
- supply your mortgage details, such as the current mortgage balance, term and amortization period
- have your lender assess your homes value
Youll need a lawyer or a title service company to register your home as collateral. Ask your lender for more details.
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How Much Are Closing Costs For Home Equity Loans And Helocs
The average closing costs on a home equity loan or HELOC will usually amount to 2% to 5% of the total loan amount or line of credit, accounting for all lender fees and third-party services. These may be covered by the lender under “no-fee” HELOCs and home equity loans, however keep in mind that lenders may have already baked these fees into the interest cost of your loan. Remember to compare APRs, and not interest rates alone, when reviewing offers from multiple lenders.
The most common closing costs on home equity loans and HELOCs include:
- Application fees are viewed as an initial commitment to doing business. They go toward offsetting advertising and marketing costs for the lender.
- Processing and underwriting fees cover the lender’s administrative costs of creating the loan and seeing it through to closing.
- Appraisal fees cover the cost of the appraiser’s inspection. This is done to establish the fair market value of the property securing the loan, and it’s also used to calculate your loan-to-value ratio.
- Title and escrow fees cover the title search, including title insurance and the administrative costs of signing, notarizing, delivering and recording loan documents. Certain states may also have attorney’s fees if their services are required.
- County recording fees are assessed by the county to update public records as they pertain to property ownership.
What Is Included In Closing Costs
Closing costs on a $200,000 home can range from $5,000 to $10,000, depending on several factors. Fees cover costs incurred by your attorney, lending institution, and appraiser to cover professional and administrative services. They include:
- Property transfer taxes
- Origination fees
- Escrow fees
- Other smaller fees to cover town recording, flood certification, appraisal, credit reporting, tax service, underwriting, rate locks, etc.
Keep reading for a breakdown of each cost.
Property transfer tax
In Vermont the largest closing cost is usually the Vermont property transfer tax, which is paid by the buyer of the house, based on the sale price. For the first $100,000 of the sales price of an owner-occupied home, the fee is calculated at a rate of .05% . For amounts over $100,000, the fee is calculated at a rate of 1.45% of the sales price.
For example, you would calculate the transfer tax on a $200,000 house like this:
Transfer tax on first $100,000 = $500Transfer tax on second $100,000 = $1,450 Total transfer tax = $1,950
The calculation above is based on owner-occupied homes. For second homes or investment properties, the rate is 1.45% on the entire sale price, so closing costs are higher. In other words, the transfer tax on a $200,000 second home would be $2,900 .
Title search fees
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How Does A No Closing Cost Refinance Work
A no closing cost refinance sounds great, right? Almost too good to be true? Well in some ways, it is. The truth is, you will always end up paying somewhere to refinance a mortgage. Whether you pay up front or as part of the loan, you will be paying something closing costs, origination fees or a higher mortgage rate.
A no closing cost refinance loan usually has an interest rate that is a bit higher to make up for the closing costs the lender paid for you. The rate could be .5% higher over the life of the loan, which will cost you tens of thousands of dollars more in interest.
That said, there are advantages to a no closing cost refinance that are worth considering:
- No further lender fees
- Your mortgage balance will not go higher
- You pay nothing up front
Some of the disadvantages of a no closing cost refinance:
- You will pay a higher interest rate
- The cost of the loan is considerably more expensive over the years
- Not every lender offers a no closing cost option
Home Equity Loan Qualification
Home equity loans operate much like a mortgage or auto loan. The borrower receives a lump sum of money that is paid back over a fixed time with a fixed interest rate. In 2019, the rates were averaging about 6% with some available for a lower rate and great credit score.
The terms are pretty standard, ranging from 5-to-15 years, though some can be as long as 20. Approval, by the way, is not guaranteed.
Banks are much more careful after the 2008 housing crisis, when it was more of a rubber-stamp operation. Lenders evaluate your application and generally make sure the 80% loan-to-value ratio isnt surpassed.
Basically, like most loans, home equity approval moves forward if you demonstrate the ability to repay. The ability to repay is an amazing thing. Lenders go through credit reports to verify your finances. You need to provide proof of income with pay stubs, tax returns, investments, etc. Your credit will be checked carefully. An appraisal will be required. The whole process will take several weeks before any money is released.
Its similar to applying for a home purchase loan. Another similarity: You should shop around with banks, credit unions and online lenders because interest rates can vary.
If you are hesitant because of volatility in the real-estate market, it could be very difficult to sell your home. You might investigate other options, such as mortgage modifications.
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Whats A Home Equity Line Of Credit
This type of financing, also known as a HELOC, is a revolving line of credit, much like a credit card except it is secured by your home. The lender approves you for a certain amount of credit. Generally, as long as you stay under that credit limit, you can borrow as much as you need, any time you need it, by writing a check or using a credit card connected to the account. Many HELOCs have an initial period of time a draw period when you can borrow from the account. After that, you might be able to renew the credit line but if not, you will probably have to start repaying the amount due either the entire outstanding balance or through payments over time. HELOCs generally have variable interest rates and payments so the rates and payments can go up or down over time.
Like home equity loans, you use your home as collateral for a HELOC. This can put your home at risk if you cant make your payments or theyre late. And, if you sell your home, most HELOCs make you pay off your credit line at the same time.
Home Equity Loan Fees: Do You Know What Youre Paying
Youve done your homework and found a home equity loan with a great interest rate. Bravo! But beyond obtaining an attractive rate, when looking at loan possibilities do you have a handle on what your full cost of borrowing could be? Think: closing costs and appraisal fees you may have to fork over to get the loan. The expertise of licensed appraisers, attorneys, title agents and other support staff could be needed during this time, says Rob Cook, Head of Marketing and Customer Experience for Discover Home Loans, which is why some home equity loans also carry fees and closing costs. So if youre not aware of all aspects of your loan, you may find yourself paying a lot more than you anticipated.
The key takeaway here is that not every loan is created equal and closing costs and fees vary by lender. For instance, Home equity loans from Discover have no application, origination or appraisal fees, and no cash is required at closing, Cook says. But for lenders that do charge fees and closing costs, you may be able to roll the cost into the loan amount so that you dont have to pay for these expenses upfront.
Before signing on the dotted line, take a look at the types of fees you could be paying in addition to interestand what to look for when comparing lenders:
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What Are Mortgage Closing Costs
Youre already familiar with closing costs since you had to qualify for a mortgage when you first bought your house, and a refinance is nothing more than a new mortgage agreement. To refresh your memory, closing costs are the expenses paid to create the mortgage agreement. When you refinance your loan, youll pay many of the same expenses that you paid when you took out your original home mortgage.
Calculating refinance closing costs is complex and theres no real standard method. Your location and the lender you choose are two factors that will have a large impact on your closing costs. Other factors that influence how much you pay in closing costs for a refi include the mortgage type, the term of the loan, the amount of home equity you have and your credit score. The property tax rate where you live can also have an influence on the closing costs of your refinance.
According to the U.S. Federal Reserve Bank, mortgage refinancing fees will typically run from 3% to 6% of the loan amount. ClosingCorp, a technology firm that collects and analyzes real estate data, stated in its Average Mortgage Closing Costs Report for 2019 that the average closing costs in the U.S. in 2019 were $5,749 including taxes and $3,339 without taxes.
What Are The Warning Signs Of A Dishonest Lender
Dishonest lenders may contact you with a supposed deal on financing. They may say your credit history doesnt matter. They will try to push you into more expensive agreements with less favorable terms and pressure you to commit before youve had a chance to research and consider other options. Know that legitimate lenders will give you time to review the terms of the offer in writing and want you to understand them. They will never ask you to sign blank documents or hide disclosures and key terms.
Here are some rules of thumb to spot and avoid dishonest lenders:
- Avoid a lender who wants you to apply to borrow more than the amount you need.
- Dont deal with a lender who wants you to get financing with monthly payments bigger than you can comfortably make.
- Never work with a lender who wants you to lie on a financing application like saying your income is higher than it really is.
- Avoid lenders who say to sign blank forms. If they fill in the blanks later, you dont know what theyll say.
- Never work with a lender who says you cant have copies of the documents you signed. Of course you can.
- Dont deal with any lender who tells you not to read the financing disclosures. The law says you must get them, so make sure you do and be sure to read and understand them before you sign for the financing.
- And be sure to avoid any lender who promises one deal when you apply, but gives you a different set of terms to sign, with no good explanation of the change.
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Final Thoughts On Closing Costs
Closing costs are processing fees you pay to your lender when you close on your loan. Closing costs on a mortgage loan usually equal 3% 6% of your total loan balance. Appraisal fees, attorneys fees and inspection fees are examples of common closing costs.
The specific closing costs youll pay depend on the type of loan you have, your homes value and your states laws. Sellers may also need to pay for closing costs, depending on the sale agreement.
You might be able to save on your closing costs by negotiating with your lender. You may also want to ask your seller to pay a percentage of your closing costs or take a no-closing-cost loan. In addition to your funds, make sure you review everything you need to bring to closing.
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