Believe it or not, many people do not understand equity and the power it provides.
In its purest form, equity is money. With regard to real estate(specifically, your house or other investment property), equity is measuredin terms of the value of the property minus what you owe. So, if your homeis valued at $100,000, and you owe $40,000 on it, you have $60,000 inequity (actual money that is available to you, under particularcircumstances).
Surprisingly, many people have this type of equity and donot take advantage of it. Some people are actually in dire financial straitsand fail to realize their problems can be solved very easily, by taking theequity from their home. Remember, your home is a “vault,?and the moneyinside that vault belongs to you. Best of all, you can use that money/ equityfor anything you desire, from home improvement to travel expenses tospending money.
Exactly what is a home equity line of credit or HELOC?A home equity line of credit, which lenders and mortgage brokersrefer to as a HELOC, is a different kind of home loan. An equity line hasdifferent rates and terms from a conventional first mortgage. In a standardhome loan, or mortgage, your monthly payments cover both the principalloan and the interest you are charged.
Most mortgage payments include escrow, or taxes and insurance. An equity line of credit payment does not reduce your principal loan amount and does not include escrow. You areborrowing the equity in your house and paying the bank an interest premiumon that loan. With a HELOC, you pay only the interest on the loan and,generally, you get the money for less time than you do a standard firstmortgage.
The underwriting on these loans is very simple, and in most cases, theloans are very easy to get. At close, you either get one big check, which youcan deposit into your savings or checking account or you can get a checkbook and treat your equity line of credit as another checking account. Thepayment on equity lines is very enticing. Paying interest only makes for avery low payment. It’s important to remember, though, when payinginterest only, you are not paying down the principal loan balance.
The Power of Interest-Only PaymentsSo, let’s suppose you take an equity line for $50,000 at 4.25% interest.This interest rate is based on the Prime rate, a floating rate that can changebut does not fluctuate very often. When this article was first published, the prime rate was 4.25 percent. So, on your $50,000 equity line of credit, your payment is $177.00 each month. This is an incredibly low payment on a loan of this size. This gives you a great deal of power, because you can control a large sum of money for an extremely low monthly payment. It is this low, because you are onlypaying the interest on the loan.
At the end of the first year, you will have paid the bank over $2,100.You will, however, still owe $50,000. This is because your monthlypayment is an interest-only payment. This is where some people can get introuble with home equity lines of credit. If you use all the equity in yourhome and never pay down the balance, then decide to sell your house, youwon’t make anything on the sale, because you’ll owe it all to the bank.
It is also important to understand the terms on a home equity line ofcredit (HELOC). When talking to mortgage professionals about homeequity lines of credit, be sure you understand the terms, as lenders vary onwhat they’ll offer. Like conventional mortgages, which have terms of 30years, 15 years, 10 years, etc., home equity lines also have various terms, butnot all lenders offer them. Don’t let this confuse you. Just find yourtrustworthy mortgage broker, and tell him or her exactly what you want.
Unlike mortgage payments, which include complicated yearly amortization of the principal loan amount, interest-only payments are calculated very easily. You cando it in two simple steps. To find out your payment, first learn what rate of interest you’ll be charged. If you are using 80 percent or less of the equity available and youhave an A credit rating, you’ll be able to get the best rate available, which isthe prime rate.
Now, let’s assume you have $40,000 in equity in your house, but youonly need $20,000 (taking less than 100% of the equity is important). Youtake $20,000 and multiply it by 4.25%, which gives you 850. This is whatyou’ll pay each year to borrow $20,000. Next, divide the 850 by 12 for amonthly, interest-only payment. Your payment for your $20,000 homeequity line of credit is $70.83.
This is a very powerful loan. Imagine paying less than 71 dollars for the ability to control $20,000. Some people pay more for cable TV or their monthly cell phone bill. Some people even take the equity in their home and invest it elsewhere. You’re probably figuring out how much equity you have right now, and what you can do with that money!
To learn how you can turn your equity into a never-ending money cycle thatwill fill your bank account year after year, read Winning the Mortgage Game.Whatever you decide, open the cash vault inside your home, and make useof your equity today.
Mark Barnes is author of the wealth-building system, Winning the Mortgage Game and other investment real estate books. He is also a suspense novelist, and his new novel, The League, will thrill both suspense and sports fans. Learn about Mark's wealth-building system and get his free home loan course at http://www.winningthemortgagegame.com. Learn more about The League and read an excerpt at http://www.sportsnovels.com