Buyer and Seller's Little Helper -- Equity Line of Credit
10/27/2003

To home owners who ever wanted to sell their properties, buy another house, or simply relocate to other neighborhood, there is always the dilemma of if the buying or selling comes first. If you want to buy a house first, you might not have enough cash for down pay. On the other hand, if you sell your house before you find an ideal, new house, then you have to rent and all that hassles of moving to one place to another and then to another one is neither too convenient nor cost effective. Even when you are lucky enough to have the selling and the buying transactions to start at the same time, you have to place Contingency on both the buying and selling contract, thus affecting the other buyer and seller’s will to close the deal, which may also result in lowering your selling price.

Many homeowners ask me, "Isn't there a better way?"

“Yes, there is a better way.” I responded. The answer is Equity Loan.

There are three kinds of Equity Loans. For our purposes, we are going to concentrate on one kind in this article--Home Equity Line of Credit.

Home Equity Line of Credit is a kind of loan that is simple, fast, and easy to approve. It combines the features of a home loan and a credit card. In the first ten years after your Line of Credit is approved, you may borrow how much you want up to the amount you have been approved anytime, and pay back the money fully or partially anytime, and as many times as you want. All you have to pay if you have a balance is the interest, which is calculated according to the actual period of time that you have a balance on your account. After the ten year window, if there is still balance on your account, then that amount will be become a principal that you will pay back the lender monthly in fifteen years with a variable APR.

Most financial institutions will be happy to provide you with more information on their Equity Loan. The basic loan structures from most banks and mortgage companies are very similar,  some with variable APR, some with higher limit than the others. It will be wise to compare several banks before you make the decision.

In general, Home Equity Line of Credit features the following:

The borrower can take out any amount within the approved amount, according to your how much you need, you can pay back and then borrow the money again anytime within the first ten year period.

Within the ten-year window, the borrower may take out however amount and just pay the monthly interest. The current Prime Rate is as low as 4.25%. Most banks will charge you Prime Rate plus 0.05%. Some companies will charge you 1.15% plus Prime Rate if you request that they don* look at your income as a qualification to approve the loan. Recently, the banks are having special promotional rates for their Equity Loans with rates as low as 3%. Homeowners should take advantage of the time.

Most banks will let the homeowners to borrow up to 70% to 80% of their equity value. Meaning that if your house is worth $400,000, and 80% off the value is $320,000. $320,000 minus the amount that you still own on your first home loan, let say $150,000, equals to the Line of Credit that you can borrow--$180,000.

Generally, it will only take two days for the bank to approve your application. Some even approve your loan right on the spot there with your good credit report. Since you are a homeowner already, financial institutions do not need to evaluate your application like your first home loan. Usually, they will release the money to you within two weeks after approval with no point fee.

After you sell your property, the Equity Loan will automatically be paid off with the transaction:

Equity Loan is considered the Second Trust Deed, or second mortgage. You are putting your house as collateral to get a second loan. When you sell your house, the loan will be automatically paid off from your selling amount when the escrow closes.

Even though Equity Loan entails many advantages, there are still some aspects should be taken into consideration: 

Equity Loans use variable APR. Even though the rates are low right now, but in August year 2000, the Prime Rate reached as high as 9.5%. For short-term loans the Line of Credit is a good idea, but for long-term borrowing, the rate may be higher in the future.

Home Equity Line of Credit can be approved first. Some banks are slower in transaction than the others. Some may take up to a month to release the money. Therefore if you think you might need to money for down pay on another house, you might want to get it approved as early as possible. There is no harm and no cost when you get it approved first and not takes out any money until you need it.

Even though there is no point fee or application fee to apply for an Equity Loan, but if you want to terminate the loan early they will charge a penalty around $500 depending on the bank. There is no fee if you sold your house. If you don’t need the money anymore, just cancel the loan after the contract date. This way you don’t have any penalty and as long as you don’t borrow any money from the Line of Credit, there is no interest to pay.

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