Mortgage, HomeEquity Loan, or Home Line of Credit

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Mortgage, HomeEquity Loan, or Home Line of Credit

Posted by: vicky Jan 11 2004, 07:36 PM
I'm a homeowner in TX. My parents made the house, and passed it to me. I don't owe anything to anyone (no lien) in regards to the home. The house does need remodeling, though, and I would also like to get money for paying credit and tax debts, and I thought of using my house as a collateral (or whatever it's called) for getting the money necessary. Since I've never had a mortgage, nor been involved with house loans, I would like some advice as to what kind of loan/credit i can get thru my house, ie mortgage, home equity loan, or other lines of credit. the value of the house is about $70,000, but I would only need about 20 to 30K. What are the drawbacks or benefits of the options I have? What would be the best option?

THanks

Posted by: loanuniverse Jan 12 2004, 09:35 AM
Vicky:

You have essentially three choices:

1 – A conventional mortgage. This type of borrowing will have the lowest interest rate {somewhere around 5.4% for a thirty year loan as of January 2004}. However, it might not be the best way to go in your case. I am saying this because the amount you want to borrow is small and there will be ”closing costs” involved. For argument sake, lets say that your closing costs come in at $2,500. This mean that if you decide to borrow $25,000 the use of that money already cost you 10%. While the mortgage will allow you to spread the payments over a longer period of time {15 or 30 years}, I don’t think it is a good choice unless you can’t pay the loan over a shorter period of time. Monthly payments are important when deciding if you can afford something, but there is nothing more important than your true cost of financing. This reminds me on how car salesman try to sell you on a “payment”, but you should be looking at the APR not the payment.

2 – The second option is a HELOC. A Home Equity Line of Credit. This is a good backup plan, which has the benefit of having a very low rate. You can probably get one with a rate of between 4% and 5%. There will probably be no fees involved and you have the flexibility of setting it up for a larger amount so that you can draw more later on if needed. The only thing I don’t like is that the interest rate is variable, and I am certain that interest rates will go up within a couple of years.

3 – My preferred choice for your situation would be a fixed rate Home Equity Loan. You can probably get one at about 6.5% for ten years. You might ask yourself: ”Why would I pay more than 1% extra in interest, when I can get a mortgage with a lower rate?” Well, chances are that there are half a dozen lenders in your county or the county next door {if you live in a very rural part of Texas} that have a Home Equity Loan with no fees/points.

In conclusion: If you can afford the higher payments of a home equity loan, that would be the best choice when it comes to cost of financing. You should try local lenders first specially since you are not familiar with banking and lending. While it is possible to beat the local lenders in pricing by using the internet based lenders, I think is best that on your first transaction you have the benefit of dealing with a real person. Trust me on this, I have been in banking eight years and consider myself pretty knowledgeable, but I learned many things when I got my first mortgage four years ago. It is different when you are on the other side of the desk.

Good luck & I hope this helps.
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