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| FAQ: Home Equity Lines |
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What Is A Home Equity Loan?
A home equity loan is a form of credit in which your home serves as collateral. A home equity loan is advanced in one lump sum. You make fixed monthly payments over a fixed term. A loan makes it easier to budget, since your monthly payments remain the same over the life of the loan.
What Is A Home Equity Line Of Credit?
A home equity line of credit is a form of revolving credit in which your home serves as collateral. A home equity line of credit is a set amount of money you are approved to use whenever you like. It gives you the flexibility to borrow funds when you need them. Access your funds by writing checks. As you repay the balance, you can reuse it up to your approved credit limit. You are charged interest only on the funds you use. Most home equity lines of credit feature a variable interest rate with a draw period of ten years and a repayment period of 20 years. When the draw period expires, and if the draw period is not renewed, you would begin to repay your outstanding balance in full, over the term of the repayment period.
How Much Can I Borrow?
Your loan amount or credit line limit (the total amount you are able to borrow) is determined by taking a percentage (for example 80%, 90% or 100%) of your home's appraised or fair market value, and subtracting the balances of any outstanding mortgages on the property. If you qualify for home equity financing, the minimum home equity loan or line of credit amount is $5,000. The maximum loan amount is $500,000 for a primary residence, $250,000 for a second or vacation home, and $100,000 for a non-owner occupied residence.
What Are The Terms?
Generally, home equity loans offer terms between five and 30 years. Home equity lines of credit can be drawn on for 10 years. After 10 years, you can apply to renew your line of credit. If you do not renew, you will no longer be able to draw additional funds from your credit line; your account balance will be amortized over 20 years and payable in 240 monthly installments, per the terms and conditions of your account agreement.
Is The Interest Tax Deductible?
With a home equity loan or line of credit, you may be able to deduct the interest payments from your taxes. In many cases, the interest on a home equity loan or line of credit may be fully tax deductible if:
The total amount of home equity debt on your main home and second home does not exceed $100,000 the loan-to-value ratio does not exceed 100%. You itemize your deductions on your tax return. Consult you tax advisor about your specific situation, because there can be exceptions.
For more information on the tax deductibility of interest paid on home equity loans and lines of credit, read IRS Publication #936 "Mortgage Interest Deduction."
Must I Occupy The Residence I'm Using As Collateral?
Under many home equity loan products, you do not have to occupy the residence you are using as collateral unless you are requesting a home equity loan or line of credit where the loan to value ratio is greater than 80%. The loan to value ratio is the amount of all mortgages or liens against your home in comparison to your home's value, expressed as a percentage.
What Are The Minimum Payment Terms?
For home equity loans, your monthly payment amount will be determined by the amount you borrow, your interest rate and the term of the loan. Your payment amount will stay fixed for the life of the loan. For home equity lines of credit, your minimum payment during the 10-year draw period is equal to one month's accrued interest, plus any unpaid fees (a late fee, for example) or other charges. Or, you can elect to pay 1.5% of your outstanding equity line balance each month.
When Will I Be Billed And How Often?
Your home equity loan payment will be due monthly. For home equity lines of credit, you will receive a monthly statement whenever you carry a balance or if transactions have posted to your account.
Can I Transfer Balances In From Other Accounts?
You may consolidate other debt into a home equity loan. For home equity lines of credit, you may transfer balances from other credit accounts when you open your credit line or at any point in time during the draw period.
What Is The Minimum Draw Amount On My Home Equity Line Of Credit?
Generally, the minimum draw amount on home equity lines of credit is $300.
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