Your HELOC Might Get Some Relief
By: Diane Tuman Content Manager | January 23, 2008
Today’s Wiki Wednesday Feature: Home Equity Loans and Lines
On Tuesday, the Federal Reserve delivered an emergency rate cut in an attempt to spur the economy and to try to steer clear of a full-out recession. So, what does that mean for homeowners? Well, if you’re like most Americans who own a home, you might have a home equity line of credit (HELOC) or a home equity loan. These two similar-sounding loan types — lines and loans — are also known as second mortgages and could benefit the most from the rate cut, although adjustable-rate mortgages that are re-setting soon may benefit as well.
To help tie-in the Fed’s move with our Wiki Wednesday feature, let’s review the difference between a line of credit and a home equity loan:
A line allows you to borrow money up to a certain amount of money and it’s usually tied to the prime rate. Think of it as having a credit card with a spending limit that you can draw on whenever you need to. For example: A borrower might obtain a $75,000 HELOC at “prime plus one.” This means that the interest rate is one percentage point higher than the prime rate. If prime is 5.5%, then the HELOC is 6.5%. So, since the Fed cut rates, this will affect your HELOC interest rate and you could see a difference as soon as the next one or two billing cycles.
A home equity loan is when a lender gives you a set amount of money and you pay it back over a fixed payment schedule. Typically these loans have fixed interest rates, so they will not be affected by the rate cut.
Another good breakdown of how the Fed’s rate cuts affect consumers across the board is outlined in the Wall Street Journal. And, one last plug: For daily doses of straight-up mortgage advice I like to turn to Rhonda Porter and Brian Brady. Or, if you have a favorite mortgage blogger that is helping to make sense out of this topsy-turvy subprime world, please leave a comment.
Ed: Wiki Wednesdays is a weekly feature that highlights helpful or interesting articles from the Real Estate Guide.
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Jayson on January 24, 2008 12:02 pm
This is good news for many current homeowners. A lot of homeowners can’t refinance because their LTV is too high so relief from a HELOC makes it so they can enjoy some of the benefits from the interest rate cut.
Is it up to the bank to pass on the savings? If so, do you think they’ll try to keep the rates the same so they can counter some of the lost funds from foreclosures?
Rhonda Porter on January 24, 2008 1:55 pm
Thanks, Diane. I’m flattered you read Mortgage Porter!
Your HELOC Might Get Some Relief | Line Of Credit on January 25, 2008 2:27 am
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Mortgage Maniac on January 26, 2008 10:29 pm
Thanks for the definitions on heloc and home equity loans. I wasn’t quite sure of the difference.
TIm on January 27, 2008 6:11 pm
For those of you who don’t know how the prime rate and fed funds rate are connected, check out a quick reading article I wrote located at http://themoneykings.com/blog/understand_the_prime_rate_and_save_money
It just helps show how changes to the fed funds rate can end up affecting the rates you pay for mortgages, credit cards, etc.
Lee Matthews -- Financial Concepts West on January 28, 2008 11:53 am
“Well, if you’re like most Americans who own a home, you might have a home equity line of credit (HELOC) or a home equity loan.”
A HELOC is, by far, the superior of the two. You can use a HELOC as an “interest cancellation” account and payoff your mortgage many years sooner than you thought:
Today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.
And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.
A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)
And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.
It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.
I’d be happy to provide further details…
Brian Brady on January 28, 2008 6:38 pm
Thanks, Diane!
House on January 29, 2008 10:12 pm
With Helocs this cheap, I didn’t benefit that much by refinancing. Who new interest rates were going to get so low.
Brian Brady on February 2, 2008 9:01 pm
Of course, there is always the risk that the HELOC money won’t be there when you need it most:
http://www.mortgageratesreport.com/heloc-account-closed
Rhonda Porter on February 12, 2008 9:34 am
Very true, Brian. Programs are changing so quickly. I no sooner do my post at http://www.mortgageporter.com on HELOCs and I’m receiving memos from Chase stating they’re pulling back on loan to values with HELOCs and declaring some Washington counties as declining values.
Yesterday, WaMU declared most zip codes in Washington as “soft” and gave LO’s just over one hour to submit loans based on old guidelines, clogging their systems and leaving most LOs out. Just an example of how quickly things change in this market. I wrote more about WaMU’s move at http://www.raincityguide.com/2008/02/11/were-not-in-a-declining-marketwere-just-soft/