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Your Home's Equity Could Be the Answer

by Terry Sullivan - Lyons-Sullivan Realty

A home equity line of credit, HELOC, is a mortgage loan made to homeowners to be used on an as-needed basis. A lender, such as a bank, will approve a borrower for a specified amount based on the equity in their home and all the necessary paperwork is signed to authorize the loan.

 

The line of credit amount is available to the borrower and no interest is due until some or all the money is used. When the money is paid back, the line of credit is again available in full to the borrower.

The specifics of the repayment will depend on the HELOC lender. It may require interest only or it may require amortized payments of principal and interest.

The proceeds from a HELOC can be used to make improvements on the home or anything else such as medical expenses, college tuition or unexpected expenses or other liquidity issues.

Unlike personal credit card interest, the interest on a HELOC may be tax deductible. Your tax advisor will be able to let you know about your situation.

Rates and fees can vary widely on HELOC loans. Borrowers should shop around, compare and get recommendations before deciding on a lender.

 

Which Value Do You Want?

by Terry Sullivan - Lyons-Sullivan Realty

Which Value Do You Want?

What your home is worth depends on why you ask the question. It could be one value based on a purchase or sale and an entirely different value for insurance purposes.

 

Fair market value is the price a buyer and seller can agree upon assuming both are knowledgeable, willing and unpressured by extraordinary events. This value is generally indicated by a comparable market analysis done by real estate professionals.

Insured value is determined for insurance coverage. Homeowner policies typically have replacement clauses in them and the cost of demolition, new construction and the added complexities of matching existing construction could exceed the cost of new construction.

Investment value is based on the income it can generate during its useful life. This value is dependent on what kind of yield an investor requires to capitalize the value over time. The formula for this is to divide net operating income by the capitalization rate required by the investor.

The assessed value of a home is used to determine the property taxes the owner must pay. This value is determined by the responsible state government agency.

Homeowners are generally more familiar with their home’s market value. Since it can be lower than the replacement cost, owners should review the insured value with their property insurance agent periodically.

There can be a surprising difference in each of these separate values. It is important to know the purpose that it is going to be used for the value. 

7 Steps to Take Before Buying Your First Home

by Terry Sullivan - Lyons-Sullivan Realty

7 Steps To Take Before Buying Your First Home

 

   Opinions expressed by Forbes Contributors are their own.

How to get your finances in order -- and to make sure now is the right time for you to buy.

Shutterstock

Buying a home to call your own a significant milestone in the journey of adulthood. For some, it represents more of an ingrained belief than a purely financial decision. For others, it’s a goal they’ve been working towards for a long time. So, if you’ve made the decision that purchasing a home is important both to your lifestyle and to your peace of mind, there are some crucial steps to consider before you begin house hunting.

  1. Credit rating—If you own a credit card, you can likely check your credit rating and get a free credit report. If you find some dents and dings in your credit, the consequence is the potential of having to pay a higher interest rate. Make sure you have full documentation of any negative or disputed aspects of your report—the mortgage companies will weigh this very heavily in deciding whether to offer you financing. If your credit rating is less than favorable, gain a clear understanding of what it will take to shine it up before going full tilt into the buying process.
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  3. Budget analysis—Know your numbers. How much are you spending on your rent, debt and other fixed costs? It’s nice to believe you can swing the monthly mortgage, but it’s another thing to know that you can. Understand where your paycheck goes and how much might be “leaking” into unknown places—this is vital before you make that leap. There are so many potential unknowns.
  4. Debt percentage—33/38 are the numbers to be concerned with. 33% of your monthly income can be devoted to housing costs, while 38% includes consumer debt. If you are outside of these limits, you might not qualify for the mortgage.
  5. Down payment—Your mortgage company will look closely at the source of your down payment. It will look to your bank statements and scour them for money movement, such as sizeable deposits in and money transferred out. If you are receiving a gift or loan from your family, make sure it’s in place for a long period of time. The mortgage company will also want to make sure you not only have the required down payment funds available, it will make sure you have closing costs ready and available as well. Preplanning is critical.
  6. Additional costs associated with ownership—In deciding to purchase, you are now signing on to commit to new costs that you might not have previously considered. While you have been paying rent month after month, you will now be taking on Real Estate taxes, maybe an Association Maintenance Fee, additional costs for utilities, homeowner’s insurance and maintenance and repair costs that have never been a part of your normal monthly outflow. For this reason, be sure you have plenty of wiggle room in your budget.
  7. Interest rate environment and mortgage choices—On any mortgage website, you will be thrust into a barrage of choices that are sure to make your head spin. You will see mortgages that are fixed and variable rate, points (which are prepaid interest), length of time; 10-30 years, and more. Additionally, you will have to decide to lock in a rate or let it float with the mortgage. In order to make a good decision, you need to understand whether we are in a rate environment that is rising, static, or falling. Most importantly, understand the impact your choices have on your cash flow.
  8. The housing market in your area—If there is anything you want to get a good handle on beforeyou jump in, it is the nature of the housing market in your area. If homes are being bid up as a matter of course, be wary of diving in. Housing prices don’t move in only one direction. If you overpay for a home in a hot market, you might find yourself with negative equity for a long time until the market reignites.

Buying a home might be very important you and your family. Make sure you understand the numbers and the issues before your emotions take over.

4 Drawbacks of Home Equity Loans

by Terry Sullivan - Lyons-Sullivan Realty

4 Drawbacks of Home Equity Loans

Taking out a home equity loan against the value of your property can backfire if you fail to avoid these common pitfalls in the borrowing process.

When you need a quick source of funds, a home equity loan can be tempting. Done wisely, you can use the lower-interest debt secured by your house to pay off debts with high interest rates, like credit cards. It’s also a good choice if you know exactly how much you need to borrow for a big expenditure like a new kitchen.

Home equity loans aren’t always the best choice for accessing cash. The best use for home equity is to buy things that will contribute to your home’s value, like a needed remodel, or your family’s future income, like a college education. Consider carefully before you cash in home equity to spend on consumer goods like clothing, furniture, or vacations.

The fact that you’re staking your home against your ability to pay off the debt is just the beginning of the potential drawbacks.

Drawback #1: Money Doesn't Come Cheap

A home equity loan is a second mortgage on your house. Interest rates are usually much lower for a home equity loan than for unsecured debt like personal loans and credit cards. But transaction and closing costs, similar to those for primary mortgages, make home equity loans a pricey — and imprudent — way to finance something you may want but don’t absolutely need, like a fur coat, exotic vacation, or Ferrari.

The average closing costs on a $200,000 mortgage are $4,070. To compare offers on competing home equity loans, use a calculator that compares fees, interest rates, and how long you’ll take to pay back the loan. Ask your current mortgage lender if it offers any discounts if you get a second mortgage from the same company.

Tax papers stored in a home office

Drawback #2: Early Payoff Can Be Costly

Home equity loans almost always have fixed interest rates, so you know your monthly payment won’t rise. Do check to see if there’s a pre-payment penalty — a fee the lender will charge if you pay back the loan early because you sell your house, or you just want to get rid of the monthly payment.

Such early-termination fees are typically a percentage of the outstanding balance, such as 2%, or a certain number of months’ worth of interest, such as six months. They’re triggered if you pay off part or all of a loan within a certain time frame, typically three years. Despite the penalty, it may be worthwhile to refinance if you can lower interest rates sufficiently.

If you want to be able to borrow money periodically, it may make sense to go for a home equity line of credit instead of a lump-sum second mortgage. Although more lenders are charging stiff prepayment penalties for HELOCs too, these are triggered when the line is closed within a certain period, such as three years, not when the balance is paid off. Bear in mind that interest rates on most HELOCs are variable.

The big advantage to a credit line is that you can borrow whatever amount you need as you need money. The big drawback is that the lender can shut off the line of credit if the value of your home falls, your credit goes south, or just because it no longer wants to offer you credit.

Drawback #3: Beware Predatory Lenders

Some lenders don’t act in your best interest. Theoretically, lenders are supposed to follow underwriting guidelines on appropriate debt and income levels to keep you from spending more than you can afford on a loan. But in practice, some unscrupulous lenders bend or ignore these rules.

Always shop for the best deal, rather than accepting the recommendation of a home-improvement contractor. Some will try to pressure you into taking their loans at above-market rates — and jack up the price if you don’t. According to the U.S. Department of Housing and Urban Development, you should avoid anyone who insists on only working with one lender or who encourages you to do things like overstate your income.

Drawback #4: Your House Is at Stake

A home equity loan is a lien on your house that usually takes second place to the primary mortgage. As such, home equity lenders can be left with nothing if a house sells for less than what’s owed on the first mortgage. To recoup losses, second-mortgage lenders will sometimes refuse to sign off on short sales unless they’re paid all or part of what they’re owed.

Moreover, even though the lender loses its secured interest in the house should it go to foreclosure, in some states, it can send debt collectors after you for the balance, and report the loss to credit agencies. This black mark on your credit score can hurt your ability to borrow for years to come.

There are benefits to home equity loans. Often you can write off the interest you pay on the loan. Consult a tax adviser to see if that’s the case for you. And the rates can be lower than what you’d pay for an unsecured, personal loan or if you used a credit card to make your purchase.

Displaying blog entries 1-4 of 4