Home equity loans and lines of credit: Similar loans,
Getting one's hands on an extra pile of cash has seldom been easier
for homeowners than it is today, thanks to the recent deluge of home equity lending
offers. Indeed, both lines of credit and traditional home equity loans, or second
mortgages, can help make planned house repairs and additions a reality.
Yet consumers should consider several things before
jumping into either financing product, experts say. That's because home equity
lines of credit typically are a good deal for those who want a lower up-front
rate and access to money at unpredictable times. However, home equity loans are
better suited to those who need a specific amount of money and payment stability.
a home equity line of credit, you can open it and you're only going to pay for
the amount of money you use," says Peter Traum, a Morristown, N.J., branch manager
for KeyCorp's Champion Mortgage lending subsidiary. "With a second mortgage, you're
going to get a check, and you're going to make payments until you pay that amount
Both lending devices use a borrower's house as collateral,
with lenders in either case assessing the property to determine how much they
are willing to extend. The amount is determined by taking the assessed value and
multiplying by a percentage figure, known as the loan-to-value ratio. Traditionally
as high as 80 percent, that maximum ratio climbed to just over 90 percent in 1997.
example, a lender evaluating a $100,000 house with $40,000 still outstanding on
the first mortgage would multiply its value by 90 percent. The company would then
take the $90,000 result, subtract the outstanding debt, and allow the borrower
access to as much as $50,000 in credit.
Once the amount to be borrowed is set, a homeowner should next consider
closing costs, which lenders say are roughly the same for both loans
and credit lines. Borrowers may pay as little as $150 or as much
as $800, though banks will sometimes waive fees for those who carry
a large enough outstanding balance or maintain one for a sufficient
amount of time.
As for the time involved, the application process
will usually take one to two weeks from start to finish.
But that's where the similarities between the two lending products
Homeowners with lines of credit only have to endure the application
process once because they can write checks as needed up to their credit limit,
rather than obtain multiple fixed-amount loans. In fact, they typically face
only lender-financed credit reviews every one to three years to keep the lines
open, and they usually don't even have to talk to their bank at that time, says
Garry Fisher, a senior vice president in Wachovia Corp.'s retail product management
"A lot of banks, including Wachovia, are starting
to use credit scoring and other statistical things in order to ascertain
whether or not they even have to contact the customer," Fisher says.
"They can just buy a credit score from a (credit) bureau or use
an internal customer score."
Credit line upkeep can still lead to annual maintenance fees similar
to those charged by credit card issuers, and some borrowers will
also be charged fees if they don't use the line for a long enough
The rate benefit of lines of credit can help offset those costs. The
credit line rate is often even lower for at least some period because
stiff competition among lenders has spurred many to offer introductory
teaser rates and other incentives. To check local rates in your neighborhood,
Despite all the benefits of a line of credit, experts
still advise people who need to make purchases of predetermined
amounts to go with a home equity loan. That is in part because payments
will be locked in at signing, rather than fluctuate along with the
"With that home equity loan, the rate is fixed and
etched in stone for the life of the loan," Champion's Traum says.
Home equity loan borrowers also will know in advance
what their payments are, allowing for a more disciplined approach
to paying back the lender. Either way, homeowners should make sure
they really need the money since lenders can seize their homes to
settle a debt if necessary.
-- Posted: April 7, 2003