If you’re thinking about getting a home equity loan or a home equity line of credit, shop around. Compare financing offered by banks, savings and loans, credit unions, and mortgage companies. Shopping can help you get better terms and a better deal, which is important when the financing is secured by the value of your home. Show
Using Your Home as CollateralWhat does it mean to use my home as collateral?You use your home as collateral when you borrow money and “secure” the financing with the value of your home. This means if you don’t repay the financing, the lender can take your home as payment for your debt. Refinancing your home, getting a second mortgage, taking out a home equity loan, or getting a HELOC are common ways people use a home as collateral for home equity financing. But if you can’t repay the financing, you could lose your home and any equity you’ve built up. Your equity is the difference between what you owe on your mortgage and how much money you could get for your home if you sold it. High interest rates, financing fees, and other closing costs and credit costs can also make it very expensive to borrow money, even if you use your home as collateral. How can I reduce the risks of borrowing against my home?Consider your options and your budget. Keep in mind the risks involved when using your home as collateral. If you can’t pay the money back, you could lose your home to foreclosure. Talk to an attorney, financial advisor, or someone else you trust before you make any decisions. Some dishonest lenders target older adults, homeowners with modest means, and borrowers with credit problems. They offer financing based on the equity in your home, not on your ability to repay the balance due. If you fall behind on the payments, the lender can try to declare your financing in default and serve you with a notice of default. Usually that’s the first step in the foreclosure process. What are the warning signs of a dishonest lender?Dishonest lenders may contact you with a supposed deal on financing. They may say your credit history doesn’t matter. They will try to push you into more expensive agreements with less favorable terms and pressure you to commit before you’ve had a chance to research and consider other options. Know that legitimate lenders will give you time to review the terms of the offer in writing and want you to understand them. They will never ask you to sign blank documents or hide disclosures and key terms. Here are some rules of thumb to spot and avoid dishonest lenders:
What is a home equity loan?A home equity loan — sometimes called a second mortgage — is a loan that’s secured by your home. You get the loan for a specific amount of money and it must be repaid over a set period of time. You typically repay the loan with equal monthly payments over a fixed term. If you don’t repay the loan as agreed, your lender can foreclose on your home. The amount that you can borrow — and the interest rate you’ll pay to borrow the money — depend on your income, credit history, and the market value of your home. Many lenders prefer that you borrow no more than 80 percent of the equity in your home. How do I shop for a home equity loan?Consider contacting your current lender to see what they offer you as a home equity loan. They may be willing to give you a deal on the interest rate or fees. Ask friends and family for recommendations of lenders. Then do some research into the lenders’ offerings and prepare to negotiate a deal that works best for you. Use the Shopping for a Home Equity Loan Worksheet.
The Three-Day Cancellation RuleWhat is the Three-Day Cancellation Rule?This federal rule says you have three business days, including Saturdays but NOT Sundays, to reconsider a signed credit agreement that secures your principal residence and cancel the deal without penalty. The Three-Day Cancellation Rule applies to many home equity loans (and also applies to home equity lines of credit, see below). You can cancel for any reason, but only if you’re using your main residence as collateral. That could be a house, condominium, mobile home, or houseboat. The right to cancel doesn’t apply to a vacation or second home. Under the Rule, how long do I have to cancel?You have until midnight of the third business day to cancel your loan. Day one begins after all these things have happened
If you didn’t get the disclosure form or the two copies of the notice — or if the disclosure or notice was incorrect — you may have up to three years to cancel. How do I determine the third business day?You may get the disclosure and two copies of the right to cancel notice at your closing. In that case, Day One begins after the closing. But if you get the disclosure form and the two copies of the notice before or after the closing, Day One begins on when the last of the three things happened. So if the closing happens on a Friday, and if that was the last thing to happen, you have until midnight on Tuesday to cancel. But if you received your Truth in Lending disclosure form on Thursday and you closed on Friday, but didn’t receive two copies of the right to cancel notice until Saturday, you have until midnight on Wednesday to cancel. For cancellation purposes, business days include Saturdays but not Sundays or legal public holidays. During this three-day waiting period, the lender cannot directly or through another person take action related to the loan. The lender can’t deliver the money for the loan (other than in escrow), or begin performing services. If you’re getting a home improvement loan, the contractor can’t deliver any materials or start work. The lender can begin to accrue finance charges during the delay period. What steps do I take if I want to cancel?You must inform the lender in writing that you want to cancel:
Will I owe any money on the contract if I cancel during the three-day waiting period?If you cancel the contract, the security interest on your home is no longer valid, your home is no longer collateral and can’t be used to pay the lender. You don’t have to pay anything, and any amounts you paid must be refunded, including the finance charge and other charges, such as application fees, appraisal fees or title search fees, whether paid to the lender or to another company that is part of the credit transaction. The lender has 20 days after receiving your notice to return all money or property you paid as part of the transaction and to release their interest in your home as collateral, which they must do even though the security interest is no longer valid from the day the lender received your cancellation notice. If you got money or property from the lender, you can keep it until the lender shows that your home is no longer being used as collateral and returns any money you’ve paid. Then, you must offer to return the lender’s money or property. If the lender doesn’t claim the money or property within 20 days, you can keep it. Under the Rule, can I waive my right to cancel the contract?If you have a personal financial emergency — like damage to your home from a storm or other natural disaster — you can waive your right to cancel. That eliminates the three-day waiting period so you can get the money sooner. To waive your right:
Your right to cancel gives you extra time to think about putting your home up as collateral for the financing to help you avoid losing your home to foreclosure. If you have a personal financial emergency, you can waive this right, but be sure that’s what you want before you waive it. Are there exceptions to the Three Day Cancellation Rule?Yes, the federal rule doesn’t apply in all situations when you are using your home for collateral. Exceptions include when
In these situations, you may have other cancellation rights under state or local law. Home Equity Line of Credit (HELOC)What’s a home equity line of credit?This type of financing, also known as a HELOC, is a revolving line of credit, much like a credit card except it is secured by your home. The lender approves you for a certain amount of credit. Generally, as long as you stay under that credit limit, you can borrow as much as you need, any time you need it, by writing a check or using a credit card connected to the account. Many HELOCs have an initial period of time — a draw period — when you can borrow from the account. After that, you might be able to renew the credit line but if not, you will probably have to start repaying the amount due — either the entire outstanding balance or through payments over time. HELOCs generally have variable interest rates and payments so the rates and payments can go up or down over time. Like home equity loans, you use your home as collateral for a HELOC. This can put your home at risk if you can’t make your payments or they’re late. And, if you sell your home, most HELOCs make you pay off your credit line at the same time. How do I pay back a HELOC?Because a HELOC is a line of credit, you make payments only on the amount you actually borrow, not the full amount available. A HELOC also may give you certain tax advantages unavailable with other kinds of loans. Talk to an accountant or tax adviser for details. How much money can I borrow on a home equity line of credit?It depends on several things, including your creditworthiness That means your history of regularly repaying money and the amount of debt you owe now. Comparing home equity loans and home equity lines of credit
Safeguards and Protections for HELOCsWhat federal safeguards apply to HELOCs?Under federal law, lenders must tell you:
Lenders must give you a brochure describing the general features of HELOCS. If you decide not to take the HELOC because of a change in terms from what you expected, the lender must return all of the fees you paid. Lenders also must give you three business days, including Saturdays, but not Sundays, to cancel a HELOC, which usually starts to run from when you opened the plan, or when you received all material disclosures, whichever occurs last:
Generally, once your home equity plan is opened, if you pay as agreed, the lender may not end your plan, demand that you speed up payment of your outstanding balance, or change the terms of your account:
How can I avoid possible pitfalls with a HELOC?Before you sign, read the closing papers. If the HELOC isn’t what you expected or wanted, don’t sign the financing. Either negotiate changes or walk away. High-Cost and Higher-Priced MortgagesWhat special protections are available for high-cost mortgages and higher-priced mortgages?A high-cost mortgage is a mortgage used to buy a home, a home equity loan (or second mortgage or refinance), or a HELOC that is: secured by your principal residence; and the APR (or points and fees charged) exceed certain threshold amounts that are tied to market conditions. If you have a high-cost mortgage, you may have additional rights under federal law, the Home Ownership and Equity Protection Act (HOEPA) and the CFPB has more information about your special rights. If instead you have a higher-priced mortgage with an APR higher than a benchmark rate called the average prime offer rate (the interest rate charged to borrowers that have the best credit), you may have additional rights. You may be entitled to these rights if your higher-priced mortgage is used to buy a home, for a home equity loan, second mortgage, or a refinance secured by your principal residence. These additional protections do not apply to HELOCs. If you have a higher-priced mortgage, the CFPB has additional information about your rights. Lending and Mortgage Servicing Practices That Can Hurt YouYou could lose your home and your money if you borrow from dishonest lenders. Certain lenders target homeowners who are older or who have moderate means or credit problems — and then try to take advantage of them by using deceptive, unfair, or other unlawful practices like these:
You may encounter harmful practices related to the day-to-day management (called servicing) of your mortgage payments. There are several types of servicing abuses, including a lender charging you improper fees or not giving you accurate or complete account statements and payoff figures. Learn more about your rights when making your mortgage payments. Some of these harmful home equity practices violate federal credit laws dealing with disclosures about financing terms, debt collection, and discrimination based on age, gender, marital status, race, or national origin. You also may have additional rights under state law that would let you bring a lawsuit. Report FraudIf you think your lender has violated the law, you may want to contact the lender or servicer to let them know. At the same time, you also may want to contact an attorney. You also can report fraud to
What are the disadvantages of a home equity line of credit?Variable interest rates could increase in the future.. There may be minimum withdrawal requirements.. There is a set draw period.. Possible fees and closing costs.. You risk losing your house if you default.. The application process for a HELOC is longer and more complicated than that of a personal loan or credit card.. Why would someone need a home equity line of credit?A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans 1 such as credit cards.
Is an equity line of credit a good idea?A home equity line of credit (HELOC) can be a good idea when you use it to fund improvements that increase the value of your home. In a true financial emergency, a HELOC can be a source of lower-interest cash compared to other sources, such as credit cards and personal loans.
Is an equity line of credit considered a mortgage?A home equity line of credit, or HELOC, is a type of second mortgage that lets you borrow against your home equity. Somewhat like with a credit card, you use money from the HELOC as needed, then pay it back over time.
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