My consumer watchdog coverage is largely thanks to our readers telling me about their most stubborn problems. People have contacted me by phone, email or a submission form at the end of one of my stories.
A number of you have come through with questions you think I should investigate. I’ve corresponded with many of you over email about your submitted inquiries, and I turned some into stories.
Here’s a submitted question about home equity lines of credit — a financial concept that might be difficult for you to untangle.
What exactly is a home equity line of credit?
A home equity line of credit (HELOC) is a way to borrow money against the equity in your home and to pay back the loan over time plus interest. That statement might not mean much to you, so David Homsi, an enterprise retail sales manager with Bank of America, helped me break it down.
Let’s say Joe and Sally own a house worth $100,000. It has been a while since they bought the house and now they owe $20,000 on their mortgage.
They want to do a kitchen renovation, and they decide to go with a home equity line of credit to pay for it. Home equity lines of credit are also commonly used to fund college tuition or for emergencies, said Homsi.
Their bank does some calculations: it caps their home equity “borrowing power” at 85 percent of the home’s value (85% is typical for banks) minus the mortgage remainder. In this case, that’s $100,000 x .85 – $20,000 = $65,000. Joe and Sally can borrow a maximum of $65,000 against their home’s value.
If they go with a home equity line of credit, they can draw from their line of credit in installments and pay those back plus interest over time. Different banks offer variable or fixed interest rates.
It’s a revolving account during its 10-year “draw period” — they make payments on the amounts they draw from the line, and borrow more if they need, said Homsi. After 10 years, the draw period ends, meaning they can’t continue to use the line of credit. They typically have 20 years to pay the remaining balance.
A home equity loan is slightly different. It’s one lump sum, paid back in installments with a fixed interest rate.
A home equity loan is often termed as “a second mortgage,” said Homsi. That’s because, like a mortgage, the bank is lending you a lump sum to be paid back in installments with a fixed interest rate. Homeowners will likely make payments on their home equity loan on top of their monthly mortgage payments.
So which one should you get? If you own a house and you’re comfortable with your original mortgage loan as it is, you can apply for either of these options if your bank offers them.
The major difference between them is a homeowner receives the money — A home equity loan is a lump sum upfront that is repaid monthly with a fixed rate, and a home equity line of credit allows a homeowner to access a set line of credit when they need it, with payments typically based on a variable interest rate.
You’ll likely get several proposals from your bank tailored to your specific financial situation, said Homsi.
“There is no right type of client….I’ve never encountered one client that was like the other,” he said.
Sarah Taddeo is the New York state consumer watchdog reporter for the USA Today Network/Democrat and Chronicle. She investigates stories about your consumer rights, including scams, negligent landlords, safety issues and wayward businesses. Got a story tip or comment? Email STADDEO@Gannett.com or call (585) 258-2774.