Repayment and Some Tips

by Jacob Silverman

The repayment process for a home equity loan or a home equity line of credit is dependent on the terms of the plan. Some equity plans only require you to pay interest during the loan, leaving the entire principal to be paid once the loan is due.

If your plan’s payment schedule leaves a remaining balance at the end of the plan, be prepared to make a balloon payment. A balloon payment can be done with money on hand, by refinancing the loan or by taking out a loan from another lender. Not being able to pay a balloon payment means that you could lose your home.

Usually your payments options are flexible, allowing you to pay more than the minimum payment. Because of this flexibility, many home equity borrowers make regular payments to the principal in order to avoid being stuck with an outstanding balance when the loan is due. If for some reason you decide to sell your home before the end of your plan, you will probably have to repay your equity loan.

Advice for Equity Plans

Before you decide to get a home equity loan or HELOC, ask yourself if you can afford to take on more debt. Is your employment situation stable, and if so, will you be able to eventually pay back the loan? If you’re dealing with money problems, talking with a credit counseling agency can be very helpful. If the problem is in paying your mortgage, you can get a listing of approved housing counseling agencies from the Department of Housing and Urban Development. In general, it’s best to get a home equity loan only when you have a specific use in mind for it. While a home equity line of credit offers more flexibility than a home equity loan (second mortgage), using it like just another credit card can get you in trouble down the road.

Once you’ve decided you need a home equity loan, it’s important to shop around. Make sure the lenders you talk to are reputable. Predatory lenders prey on the elderly, attempting to trick them into accepting unmanageable loans, or on people with low income or credit problems. Ask friends and relatives about the banks they have dealt with, and research the lenders you’re working with to make sure they’re dealing in good faith.

With so many fees associated with a loan and things like variable interest rates, it can be hard to determine exactly what makes one lender better than another. Try using this worksheet from the FDIC for comparing different loan offers. It will give you some good questions to ask and will allow you to keep the information about each lender organized.

Don’t hesitate to negotiate with your prospective lenders. Think of it like shopping for a car. Let them know you’re shopping around, and ask them to lower the various rates, fees and points. Make them beat the terms of another lender.

Once you select a lender, get a “good faith estimate” of all charges. By law, the lender must send you an estimate within three days of your application. Study the forms you receive, and most of all, ask questions! One or two weeks before closing, ask the lender if the terms have changed from what was in the good faith estimate.

If you know someone with loan experience, such as an accountant or tax attorney, ask them to look over the estimate, loan papers and contract. Again, make sure to ask any questions you may have. Don’t be rushed into signing a contract if you’re unsure of something or if some language in the agreement is unclear. Don’t sign forms that have blank fields. If your lender tells you they are supposed to be blank, draw a line through the field and initial it.

Most of all, don’t get a loan for more money than you need or for terms you can’t afford. Even if the lender promises you that the terms are favorable, taking on a high loan-to-value ratio can make repaying the loan difficult and jeopardize your home ownership. The loan-to-value ratio is the ratio of what you owe on your house to its overall value. Generally, lenders try to keep your loan-to-value ratio below 80 percent. For example, if you owe $250,000 on a $500,000 house, you already have a loan-to-value ratio of 0.50 or 50 percent. For a second mortgage, a lender likely won’t offer you more than $150,000, which would put you at $400,000 in total loans -- or a loan-to-value ratio of 80 percent ($400,000 divided by $500,000).

Some lenders will go over 80 percent or even offer you a loan for more than your home is worth. Try to avoid those loans as they will likely carry higher interest rates, require mortgage insurance and be more difficult to pay off if you’re forced to sell your home.