12 Things to Know About Home Equity Loans and HELOCs

Be smart if you tap home equity loans and HELOCs.

Jun 28, 2014 at 1:00PM

Credit: StockMonkeys.com.

If you need a significant chunk of money and are unwilling to borrow it or to charge it on your credit cards, what can you do? If you're a homeowner, you may be able to tap the power of a home equity loan or a home equity line of credit, or HELOC. But don't do so without learning more about them. Here are some of the key things to know.

  1. There are two main kinds of home equity borrowing: a home equity loan secured by the equity in your home and a HELOC. With the former, you borrow what you need in a single lump sum, while the latter allows you to borrow various sums over time as needed. The former has a fixed repayment schedule, while the latter is more like having revolving credit via a credit card. The former will often sport a fixed interest rate, while the latter is more likely to have a variable rate.

  2. That interest rate will depend in part on how credit-worthy you are. Those with high credit scores (such as in the 700s and above) can expect to be offered the best rates for home equity loans and HELOCs. Those with less pristine credit records will fare less well. Those planning on taking out home equity loans should check their credit reports and scores well before doing so in order to have time to correct any score-lowering mistakes. Note, too, that the rates, terms, and fees that make up the deal you're offered will vary by lender, so do shop around. Don't focus solely on the interest rate.
  3. Another consideration is that home equity loans and HELOCs can be easier to qualify for if your credit is poor. The terms might not be fabulous, but you may not have many more attractive options.
  4. Interest rates for home equity loans and HELOCs tend to be higher than those for regular mortgages, but they're also generally considerably lower than some alternatives, such as credit card debt. Thus they have some appeal when you need money.
  5. Not so long ago, before the recent credit crisis, lenders would often permit people to borrow more than 100% of the value of their home. Now they're being a little more careful, and you should expect to be able to borrow up to about 85%. Some lenders will calculate your maximum by taking a percentage of your home's value and then subtracting what you still owe on it. So if they have a limit of 80% and your home is valued at $100,000, your maximum possible loan value is $80,000. But if you owe $50,000 on the home, you're now looking at a limit of up to $30,000.
  6. Of course, you shouldn't aim for the maximum, as defaulting on a home equity loan can result in the loss of your home. That's a big deal and should factor heavily in your decision making.
  7. Know, too, that a lender can cancel a HELOC before you're done using it, which can cause financial pain. Home equity loans are sturdier, with various terms locked in.
  8. Meanwhile, if you sell your house while you've borrowed against it, you'll be expected to pay off those debts pronto.
  9. A home equity loan can be canceled within three days of being taken, per federal law, if it's secured by your primary home.
  10. Interest paid on home equity loans is generally deductible, up to $100,000 in home equity debt. 
  11. Some unscrupulous lenders out there prey on naive or older borrowers. The Federal Trade Commission has said to watch out for practices such as encouraging you to borrow (or refinance) often; adding other products to the loan package, such as insurance; ignoring your ability to pay and lending you too much so that you end up losing your home; or simply charging excessive fees. Another racket is a self-described handyman ringing your bell and offering to make repairs or renovations while helping you secure financing through some connection.
  12. Sometimes the borrower is the one making the regrettable move. For example, home equity loans taken out to finance renovations may not make your home sell for as much as expected. Borrowing via home equity loans or HELOCs in order to pay off other, higher-interest debt can be effective, but only if you have the discipline to pay the new debt off. Otherwise, you can keep spiraling deeper into debt.

Home equity loans and HELOCs can make your financial life much easier or much worse. Use them prudently -- and learn more before jumping in.

Be Smart with Your Taxes, Too -- and Save Big Bucks
You may be focused on borrowing and home equity loans right now, but keep up with tax issues, too, in order to keep more of your money. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about a simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Longtime Fool specialist Selena Maranjianwhom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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