Your Mortgage Knowledge Base

A home equity loan is a closed loan, which means you receive a single lump sum that you pay back with regular payments over a predetermined period of time. It is possible to get a fixed rate with a home equity loan.

A home equity line of credit (HELOC) usually features a variable interest rate, but gives you the ability to withdraw money at various times and at various amounts using a check or credit card. Most HELOCs are offered with a specific period during which you can borrow money. To repay, some plans require a minimum monthly payment that includes principal plus accrued interest. However, in some cases, it is possible that the payment toward the principal will not cover the entire loan balance by the end of the term. So at the end of the term, you will still need to continue payments until the principal is completely paid back. Also, it may be required that you will need to pay the entire balance all at once at the end of the term.

If you decide to apply for a HELOC, look for a plan that is best suited to your particular needs. Read the credit agreement carefully, and make sure you understand the terms and conditions, as well as the APR (annual percentage rate) and the costs of setting up the plan.

After examining all your sources of income and reviewing your documents, some lenders use your total available credit to determine your credit eligibility when considering additional loans or lines of credit. So, even if you carry no balance on your accounts, have a large home equity line of credit can make it more difficult for other loans.

Rather than “playing it safe” by getting approved for the largest line of credit, evaluate, and try to predict, exactly what you will be using the credit line for, and set up the loan or line of credit for this amount.

Most times, the interest paid on a home equity loan or home equity line of credit is tax deductible. This is a primary reason that people often choose to use the equity in their home over credit cards or other types of loans. However, this is not always the case. Instead of assuming that you will see a tax deduction, we strongly encourage you to discuss how obtaining a home equity loan or HELOC will impact your tax situation with a professional tax advisor.

• Copies of W-2s or tax returns for the previous 2 years
• If you own rental units, provide the most recent rental agreement and tax returns for previous 2 years
• Your last 3 bank statements along with the most recent statements for any mutual funds, IRA/401(k), or stock accounts
• Settlement agreement and divorce decree (if applicable).
• Non-U.S. citizens must present their Green Card or H-1 or L-1 visa.
• Recent paycheck stubs and proof of any other income, like tips, Social Security payments
• Your current mortgage note

These documents may not be all-inclusive, but by having these on hand, you will expedite the application.

Typically, home equity lines of credit carry a variable rate and not a fixed rate. The variable rate is based on some publicly accessible index, like the US Treasury Bill Rate or the Prime Rate, plus a margin. It is important that you understand what index is used as the interest rate basis of your HELOC, how often the index fluctuates and how high it has been in the last several years. Occasionally, a lender will offer a lower rate as an “introductory rate”, but the low rate is typically only low for a short period of time.

Home equity line of credit products are tied to your home, so by law, they are required to have a cap on how high the interest rate can climb over the term of the line of credit. Also note that some lenders also protect themselves against interest rate decreases when the index drops. It is important to read the fine details of your specific plan.

For approval, we must verify your credit, employment history, assets, property value, and anything else required by your particular circumstances.