|
Believe it or not, many people do not understand equity and the power it provides.
In its purest form, equity is money. With regard to real estate (specifically, your house or other investment property), equity is measured in terms of the value of the property minus what you owe. So, if your home is valued at $100,000, and you owe $40,000 on it, you have $60,000 in equity (actual money that is available to you, under particular circumstances).
Surprisingly, many people have this type of equity and do not take
advantage of it. Some people are actually in dire financial straits and
fail to realize their problems can be solved very easily, by taking the
equity from their home. Remember, your home is a "vault," and the money
inside that vault belongs to you. Best of all, you can use that money/
equity for anything you desire, from home improvement to travel
expenses to spending money.
Exactly what is a home equity line of
credit or HELOC? A home equity line of credit, which lenders and
mortgage brokers refer to as a HELOC, is a different kind of home loan.
An equity line has different rates and terms from a conventional first
mortgage. In a standard home loan, or mortgage, your monthly payments
cover both the principal loan and the interest you are charged.
Most
mortgage payments include escrow, or taxes and insurance. An equity
line of credit payment does not reduce your principal loan amount and
does not include escrow. You are borrowing the equity in your house and
paying the bank an interest premium on that loan. With a HELOC, you pay
only the interest on the loan and, generally, you get the money for
less time than you do a standard first mortgage.
The underwriting
on these loans is very simple, and in most cases, the loans are very
easy to get. At close, you either get one big check, which you can
deposit into your savings or checking account or you can get a check
book and treat your equity line of credit as another checking account.
The payment on equity lines is very enticing. Paying interest only
makes for a very low payment. It's important to remember, though, when
paying interest only, you are not paying down the principal loan
balance.
The Power of Interest-Only Payments So, let's suppose
you take an equity line for $50,000 at 4.25% interest. This interest
rate is based on the Prime rate, a floating rate that can change but
does not fluctuate very often. When this article was first published,
the prime rate was 4.25 percent. So, on your $50,000 equity line of
credit, your payment is $177.00 each month. This is an incredibly low
payment on a loan of this size. This gives you a great deal of power,
because you can control a large sum of money for an extremely low
monthly payment. It is this low, because you are only paying the
interest on the loan.
At the end of the first year, you will have
paid the bank over $2,100. You will, however, still owe $50,000. This
is because your monthly payment is an interest-only payment. This is
where some people can get in trouble with home equity lines of credit.
If you use all the equity in your home and never pay down the balance,
then decide to sell your house, you won't make anything on the sale,
because you'll owe it all to the bank.
It is also important to
understand the terms on a home equity line of credit (HELOC). When
talking to mortgage professionals about home equity lines of credit, be
sure you understand the terms, as lenders vary on what they'll offer.
Like conventional mortgages, which have terms of 30 years, 15 years, 10
years, etc., home equity lines also have various terms, but not all
lenders offer them. Don't let this confuse you. Just find your
trustworthy mortgage broker, and tell him or her exactly what you want.
Unlike
mortgage payments, which include complicated yearly amortization of the
principal loan amount, interest-only payments are calculated very
easily. You can do it in two simple steps. To find out your payment,
first learn what rate of interest you'll be charged. If you are using
80 percent or less of the equity available and you have an A credit
rating, you'll be able to get the best rate available, which is the
prime rate.
Now, let's assume you have $40,000 in equity in your
house, but you only need $20,000 (taking less than 100% of the equity
is important). You take $20,000 and multiply it by 4.25%, which gives
you 850. This is what you'll pay each year to borrow $20,000. Next,
divide the 850 by 12 for a monthly, interest-only payment. Your payment
for your $20,000 home equity line of credit is $70.83.
This is a
very powerful loan. Imagine paying less than 71 dollars for the ability
to control $20,000. Some people pay more for cable TV or their monthly
cell phone bill. Some people even take the equity in their home and
invest it elsewhere. You're probably figuring out how much equity you
have right now, and what you can do with that money!
To learn how
you can turn your equity into a never-ending money cycle that will fill
your bank account year after year, read Winning the Mortgage Game.
Whatever you decide, open the cash vault inside your home, and make use
of your equity today.
Mark Barnes is author of the
wealth-building system, Winning the Mortgage Game and other investment
real estate books. He is also a suspense novelist, and his new novel,
The League, will thrill both suspense and sports fans. Learn about
Mark's wealth-building system and get his free home loan course at http://www.winningthemortgagegame.com. Learn more about The League and read an excerpt at http://www.sportsnovels.com
|
Articles 
