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. Its important to remember, though, when paying
interest only, you are not paying down the principal loan balance.
The Power of Interest-Only Payments
So, lets 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
wont make anything on the sale, because youll 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 theyll 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. Dont 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
youll be charged. If you are using 80 percent or less of the equity available and you
have an A credit rating, youll be able to get the best rate available, which is
the prime rate.
Now, lets 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
youll 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.
Youre 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
