Equity Lines

An equity line is a line of credit secured by a lien against your home. It is a type of 2nd mortgage.

Equity lines are popular because:

1) Low and stable interest rate: They are a superior replacement for credit cards. An equity line is superior because it has a lower and much more stable interest rate and unlike credit cards an equity line is tax deductible.

2) Flexibility to use when you want: Once you are approved by lender for an equity line you do not have to use it and you can use as much or as little of your equity line as you like. This provides great budgeting flexibility for unexpected expenses that come up.

3) Flexibility to use on what you want: You can spend it on anything you want...from travel, to paying for education etc. Once you have an equity line you no longer need anyones consent or approval to spend the equity line as you see fit.

4) Peace of Mind and Security: Even if you do not need an equity line - we generally recommend that you get one just in case something unexpected comes up and you need to access cash fast. With most equity lines you get a check book to use when you want. Knowing that you have 10% of the value of your home immediately available for emergencies creates peace of mind and lowers financial risk.

What type of Equity Lines are there?

There are far fewer types of equity lines than 1st mortgages. Essentially there is Interest Only and amortized and then among those two you can choose adjustable or fixed. We generally recommend a fixed Interest Only loan for 3 or 5 years. The rates as of Fall 2006-2007 were in the 6.75% to 8.5% range with the better lenders we work with. 

What is the cost for an equity line?

Depending on the lender, the amount and what percentage of your home it ranges from $250 to $800.

What is the catch to an equity line?

#1) IF you are not financially disciplined it may not be a good idea to get an equity line since it is a loan, albeit a better one than credit cards, you will still have to pay it back.

#2) If you max out your equity line and the combined loan to value (called CLTV in the mortgage business) is 90% or more of your appraised value it will be difficult to refinance your home down the road.

3#) If you have taken $20,000 out on your equity line and you want to refinance your 1st mortgage... you will have to pay off the equity line in the refinance of the 1st mortgage. You can do that with the new mortgage but if you have maxed out the combined loan to value (CLTV) to 90% or more and housing prices in your area become soft it will be more difficult to refinance your home. 

How is the best way to use an equity line from a financial planning perspective?

If you have significant credit card debt or large car payments or installment debt it is smart to use the lower cost tax deductible equity line to pay these off. This is especially true for younger teachers who have a young family or a spouse still in school. When Calfers.com runs a cash flow analysis for you generally you end up with hundreds if not thousands of extra dollars per month.

Is an Equity Line A BETTER idea than refinancing my first mortgage?

Generally no. AN equity line is more expensive. There are vastly fewer choices in equity lines than 1st mortgages.

But the most important reason is the following....If you take out an equity line for 10% of your home value and your first mortgage is for 50% of your current home value...there is 30% of the value of your home as equity that will remain locked in your home until you refinance the first or sell your home. You cannot change the amount of your first mortgage and thus pull out equity (Equity Harvest or Equity Reposition) and put this dead equity to work if you have an equity line with an outstanding balance. You first must pay off that equity line either before refinancing the first mortgage or as part of the refinance of the 1st mortgage.

If I get a $50,000 equity line and use $12,000 of it how much do I have to pay back?

$12,000 plus the interest. The remaining $38,000 of the $50,000 was never used therefore it does not have to be paid back.

How do I qualify for an equity line?

You have to own a home...give us a call and we will walk you through it and find you the best lender.

If you are a little stretched all the more reason to call us since as mortgage experts we know how to make you look more attractive to a mortgage lender. One way we do this is to pay down installment debt to 10 months of payments left (this does not include credit cards) and then legally we do not have to disclose this in when you either refinance or get an equity line. ie. Your 2 car payments total $800 a month and you have 12 months on one car and 14 months on the other by paying 2 months on one and 4 months on the other car these payments would not have to be listed on your loan application.