In my last post, I wrote about a divorced woman whose debt was piling up. She wanted to hold onto her marital home but things kept breaking down and, of course, everything requires routine maintenance. That's just life!
So, I told her about a Home Equity Line of Credit or HELOC. It's a revolving line of credit, typically with a variable interest rate. A fixed home equity loan (sometimes called a "second mortgage") is just that: a loan for a fixed amount, term, and interest rate.
With either, the amount you can borrow is based on the equity in your home and typical credit underwriting factors. Both are subordinate to primary mortgages, but because fixed home equity loans work somewhat like conventional mortgages, people sometimes refer to them as "seconds."
What's the difference? HELOCs are revolving lines of credit in which the lender sets a credit line for you. You borrow by using the line as you wish to pay for repairs, consolidate bills, a vacation, cosmetic surgery, whatever. HELOCs are often offered with low application fees and closing costs (and sometimes with no costs at all). Interest rates are usually somewhat higher than for fixed home equity loans.
HELOCs often have terms of 10 or 15 years and at maturity, the entire remaining balance is due in full (unless you refinance your mortgage). During the term of the HELOC, you pay at least the minimum each month (just like a credit card). In most states, the mortgage company can foreclose if you default on a HELOC or fixed home equity loan just as they can on first mortgages.
I'm not aware of any lender offering HELOCs with fixed interest rates, but the mortgage universe is so large, I wouldn't be surprised if some lender was offering one somewhere. Every HELOC I've ever seen, has had a variable rate tied to prime or some other index which sets your interest rate. Many seem to start out at lower introductory rates that become subject to increases over time.
A fixed home equity loan is for a set amount and it has a "fixed" term (hence the name). Typically such loans are available in 10-, 15- or 20-year terms. With them, your monthly payment doesn't vary and your interest rate is locked for the life of the loan (provided that it isn't a fixed home equity loan with a variable rate feature).
Is this starting to get complicated? You bet! Be sure to read the fine print and ask a lot of questions of your loan officer!
So, what about the woman with the bad roof? She was persuaded to get a home inspection by a licensed home inspection agent while she considered her options. The house was approaching a point where more costly repairs might also become necessary. Doing the math and having all the right information made her decision easier.
She opted to sell the property and move to a newer home requiring less maintenance. She knew she couldn't sell it and get what she wanted for it without first doing some of the repairs. She concentrated on the things that most potential buyers focus on (the roof, new paint job and new carpet in the family room).
Prior to making the repairs, she also called two realtors to get independent market appraisals, as well as their opinions on the marketability of the property. She requested assessments both with and without the repairs. Both agreed the repairs were necessary to market the house effectively, and both believed that the repairs would generate a decent selling price that would more than cover her costs.
The repairs were completed within a month and the house sold a little more than a month after listing it. She and the boys moved to a new property only a mile away. She paid off all her debt (including the new car), put herself in a far more comfortable position and later told me that moving to a new home was actually a great relief.
She explained that she realized afterward that part of her stress had been because of her concern that her ex-husband might come by one day and see that the house was not being taken care of as it had previously. She said moving to a new house represented the fresh start she needed to move beyond the relationship.
Brian Kilroy is a FWW supporter and retired Vice President of MBNA America Bank, N.A. He directed the Financial Advisory Service, an employee assistance, credit education and lending unit servicing MBNA employees worldwide.
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