Home Equity Loans & Lines of Credit

This information is valid only for lines of credit applications submitted to Personal Bankers at Wells Fargo Bank branches, by phone or online. Rates subject to change and vary by Wells Fargo Bank market area. $165 interest-only monthly payment is based on 6.615% variable Annual Percentage Rate (APR) as of January 6, 2010, for a credit amount of $30,000, 70% maximum combined loan-to-value and secured by an owner-occupied residence in California, assumes excellent borrower credit history, and includes a 0.375% discount for a Wells Fargo® PMA® Package and a 0.125% limited-time bonus relationship APR discount, which is valid on applications submitted between January 2, 2010, and March 19, 2010. . Automatic payment required for relationship discount(s) and limited-time bonus relationship discount.

Interest only loans/lines provide for the payment of interest for a set period of time and payments of principal and interest for the remainder of the loan term. During the interest only period, principal is not reduced. At the end of this period, your monthly payment will increase, possibly substantially, even if you have a fixed interest rate because you will be required to pay down the outstanding principal. Always consider paying more than the minimum payment to pay down the principal. Because these product features do not require you to make principal payments during the interest only period, you may have a higher Annual Percentage Rate or interest rate than a traditional mortgage product, depending on the specific loan details.
2 The Annual Percentage Rate (APR) is variable and based on the highest Prime Rate published each day in The Wall Street Journal Money Rates Table (the "Index"), plus a margin. The Index as of December 17, 2008 is 3.25%. As of January 6, 2010 current margins for lines of credit of $10,000 to $30,000 ($500,000 maximum amount) secured by owner-occupied properties with 70% combined loan-to-value range from 7.115% to 3.365% resulting in corresponding variable APRs ranging from 10.365% to 6.615%. Minimum APR is 4.24%; maximum APR is 18%. APR does not include costs. Your APR will be based on the specific characteristics of your credit transaction, including evaluation of credit history, CLTV, property type, amount of credit, term and geographic location. Accounts are subject to a $75 annual fee which is waived for the first year and thereafter with an average daily balance of $20,000 or greater for twelve consecutive months previous to the annual fee assessment date and a $500 prepayment fee may apply if account is closed within three years from account opening. There is no annual fee or prepayment fee for accounts secured by Texas homestead properties. Opening fees may be paid to Wells Fargo, its affiliates or third parties and range from $19 to $9,000 depending on the property type, the state in which the property is located and the amount of credit extended and include applicable state or local mortgage taxes. This Account has a Draw Period of 10 years plus 1 month, after which you will be required to repay any amounts borrowed within a 15- or 30-year term, depending upon your account balance.

Approval subject to credit underwriting guidelines. Home equity loan and lines of credit are available through Wells Fargo Home Equity Group, a division of Wells Fargo Bank N.A. Deposit and loan products, including PMA Prime Checking account, offered by Wells Fargo Bank, N.A. Member FDIC

Home Equity Conversion Mortgages

The FHA's home equity conversion mortgage program (HECM) is designed to let older homeowners convert equity into cash without selling their homes. HECM loans are a type of reverse mortgage, and are made by banks, credit unions, and other typical mortgage lenders.

A home equity conversion loan (HECM) allows homeowners to convert a portion of their home equity into cash that's paid back to them by the mortgage company. As long as they live in the home, they don't have to repay the conversion mortgage. As a result, the HECM offers the opportunity to spend equity without selling or moving.

To be eligible for the HECM, a homeowner must be at least 62 years old and agree to receive free mortgage counseling from a HUD-approved agency. Conversion mortgage borrowers also have to either own their home free and clear, or have a low outstanding mortgage balance that can be paid off from funds provided by the home equity conversion.

Receiving home equity funds:
Homeowners can elect to receive home equity conversion payments several different ways:

* Regular monthly cash advances for a specific number of years
* Regular monthly cash advances for life
* A line of credit withdrawn in increments, or in lump sum payments until the credit is exhausted
* A combination of the various payment plans outlined above

HECM withdrawals against equity are calculated by the owner's age, the current rate of interest, and the value of the home. The older an owner is, the more valuable his property. As a result, the interest rate will be lower, and he'll generally receive more money in exchange for his home equity conversion. Eligible properties must be a principal residence that meets FHA standards. If the home needs repairs to come up to those guidelines, the repairs can be financed by the home equity conversion mortgage.
Repayment of a conversion loan

A home equity conversion mortgage need not be repaid until the borrower moves, sells, or dies. But the borrower retains ownership of the home, and has the right to sell it and move if he wants to. In the event that he sells, he's entitled to keep any sales proceeds that exceed the outstanding mortgage balance. At the same time, a borrower can't be forced to sell his home to pay off the mortgage, even if the balance is more than the value of the property.
HECMs and insurance

A mortgage insurance premium paid by the borrower helps protect lenders from losses; therefore, they can make HECM loans with less risk and at more affordable rates. Both lender and borrower enjoy special protections. FHA insurance will cover any balance that's owed; in the event that a lender fails to pay what's promised to the homeowner, the FHA will step in and pay. The conversion mortgage insurance premium, as well as other closing costs, can be paid with proceeds from the HECM loan, so the borrower won't incur significant out-of-pocket expenses.

Home Equity Loans

A home equity loan allows you as a homeowner to get a loan by using the equity in your home as collateral. The equity consists of whatever funds you have invested in your property in order to own it or improve it.

Since it is a debt against your own property, which you are in actual possession of, a home equity loan is a secured debt. The property can be required to be sold if the creditor wants the money back that you have borrowed.

A home equity loan can be obtained in a lump sum or used as a revolving home equity line of credit.

A home equity loan can be either of the following:

* A fixed rate mortgage
* An adjustable rate mortgage

A homeowner who requires more money in large amounts usually applies for a home equity loan. Some expenses that make a home equity loan useful are:

* Debt consolidation
* Home repairs
* Medical bills
* College tuition for family members

Is home equity loan tax deductable?

In most cases, the answer is yes, but before trying this it's good practice to always consult a tax advisor whilst being aware of the fact, tax deduction is not an unlimited feature.
Tax benefits of home equity loans

Should You Tap the Equity in Your Home?

Food, clothing and shelter are life's basic necessities, but only shelter can be leveraged for cash. Despite the risk involved, it is easy to be tempted into using home equity to splurge on expensive luxuries. To avoid the pitfalls of reloading, conduct a careful review of your financial situation before you borrow against your home. Make sure that you understand the terms of the loan and have the means to make the payments without compromising other bills and comfortably repay the debt on or before its due date.

Recognizing Pitfalls

The main pitfall associated with home-equity loans is that they sometimes seem to be an easy solution for a borrower who may have fallen into a perpetual cycle of spending, borrowing, spending and sinking deeper into debt. Unfortunately, this scenario is so common the lenders have a term for it: reloading, which is basically the habit of taking a loan in order to pay off existing debt and free up additional credit, which the borrower then uses to make additional purchases.

Reloading leads to a spiraling cycle of debt that often convinces borrowers to turn to home-equity loans offering an amount worth 125% of the equity in the borrower's house. This type of loan often comes with higher fees because, as the borrower has taken out more money than the house is worth, the loan is not secured by collateral. Furthermore, the interest paid on the portion of the loan that is above the value of the home is not tax deductible.

If you are contemplating a loan that is worth more than your home, it might be time for a reality check. Were you unable to live within your means when you owed only 100% of the value of your home? If so, it will likely be unrealistic to expect that you'll be better off when you increase your debt by 25%, plus interest and fees. This could become a slippery slope to bankruptcy.

Another pitfall may arise when homeowners take out a home-equity loan to finance home improvements. While remodeling the kitchen or bathroom generally adds value to a house, improvements such as a swimming pool may be worth more in the eyes of the homeowner than the market determining the resale value. If you're going into debt to make cosmetic changes to your house, try to determine whether the changes add enough value to cover their costs.

Paying for a child's college education is another popular reason for taking out home-equity loans. If, however, the borrowers are nearing retirement, they do need to determine how the loan may affect their ability to accomplish their goals. It may be wise for near-retirement borrowers to seek out other options with their children.

The Right Way to Use a Home-Equity Loan

Home-equity loans can be valuable tools for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to repay the loan, its low interest rate and tax deductibility of paid interest makes it a sensible alternative. Fixed-rate home-equity loans can help cover the cost of a single, large purchase, such a new roof on your home or an unexpected medical bill. And the HELOC provides a convenient way to cover short-term, recurring costs, such as the quarterly tuition for a four-year degree at a college.

Benefits for Lenders

Home-equity loans are a dream come true for a lender, who, after earning interest and fees on the borrower's initial mortgage, earns even more interest and fees. If the borrower defaults, the lender gets to keep all the money earned on the initial mortgage and all the money earned on the home-equity loan; plus the lender gets to repossess the property, sell it again and restart the cycle with the next borrower. From a business-model perspective, it's tough to think of a more attractive arrangement.

Benefits for Consumers

Home-equity loans provide an easy source of cash. The interest rate on a home-equity loan - although higher than that of a first mortgage - is much lower than on credit cards and other consumer loans. As such, the number-one reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances (according to bankrate.com). Interest paid on a home-equity loan is also tax deductible, as we noted earlier. So, by consolidating debt with the home-equity loan, consumers get a single payment, a lower interest rate and tax benefits.

What It Is And How It Works

A home-equity loan, also known as a second mortgage, lets homeowners borrow money by leveraging the equity in their homes. Home-equity loans exploded in popularity in 1996 as they provided a way for consumers to somewhat circumvent that year's tax changes, which eliminated deductions for the interest on most consumer purchases. With a home-equity loan, homeowners can borrow up to $100,000 and still deduct all of the interest when they file their tax returns. Here we go over how these loans work and how they may pose both benefits and pitfalls.

Two Types of Home-Equity Loans Home equity loans come in two varieties - fixed-rate loans and lines of credit - and both types are available with terms that generally range from five to 15 years. Another similarity is that both types of loans must be repaid in full if the home on which they are borrowed is sold.

Fixed-Rate Loans
Fixed-rate loan provide a single, lump-sum payment to the borrower, which is repaid over a set period of time at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan.

Home-Equity Line of Credit
A home-equity line of credit (HELOC) is a variable-rate loan that works much like a credit card and, in fact, sometimes comes with one. Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or special checks. Monthly payments vary based on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the HELOC has a set term. When the end of the term is reached, the outstanding loan amount must be repaid in full.

Example

Let's say you have a $10,000 line of credit. You borrow $5,000 to pay for new kitchen cabinets. At that point, you owe the $5,000 you borrowed, and you have $5,000 remaining in your credit line, meaning that you could borrow another $5,000.

Instead of borrowing more from the line of credit, you pay back $3,000. At this point, you still owe $2,000, and you have $8,000 in available credit.

A HELOC gives you more flexibility than a fixed-rate home equity loan. It also is possible to remain in debt with a home equity loan, paying only interest and not paying down principal.

A line of credit has a variable interest rate that fluctuates over the life of the loan. Payments vary depending on the interest rate, the amount owed and whether the credit line is in the draw period or the repayment period.

During the equity line's draw period, you can borrow against it and the minimum monthly payments cover only the interest, although you can elect to pay principal.

During the repayment period, you can't add new debt and must repay the balance over the remaining life of the loan.

The draw period often is five or 10 years, and the repayment period typically is 10 or 15 years. Those are generalizations, and each lender can set its own draw and repayment periods. Lenders have been known to have draw periods of nine years, six months, and repayment periods of 20 years. Bankrate surveys home equity line of credit lenders for their current rates.

A line of credit is accessed by check, credit card or electronic transfer ordered by phone. Lenders often require you to take an initial advance when you set up the loan, withdraw a minimum amount each time you dip into it and keep a minimum amount outstanding.

With either a home equity loan or a line of credit, you have to pay off the balance when you sell the house.

What home equity debt is

A home equity loan is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. Once you get the money, you cannot borrow further from the loan. Bankrate surveys home equity lenders and is a good source for current rates.

A home equity line of credit, or HELOC, works more like a credit card because it has a revolving balance. A HELOC allows you to borrow up to a certain amount for the life of the loan -- a time limit set by the lender. During that time, you can withdraw money as you need it. As you pay off the principal, you can use the credit again, like a credit card.

A home equity loan (or line of credit)

is a second mortgage that lets you turn equity into cash, allowing you to spend it on home improvements, debt consolidation, college education or other expenses

Equity loans, lines of credit defined

There are two types of home equity debt: home equity loans and home equity lines of credit, also known as HELOCs. Both are sometimes referred to as second mortgages, because they are secured by your property, just like the original, or primary, mortgage.

Home equity loans and lines of credit usually are repaid in a shorter period than first mortgages. Most commonly, mortgages are set up to be repaid over 30 years. Equity loans and lines of credit often have a repayment period of 15 years, although it might be as short as five and as long as 30 years.

Example two

In the housing meltdown that began in 2006, many homes lost equity rather than gained it. Instead of increasing, the value of the house dropped after the home was purchased. In many instances, a home equity loan would not be available.

Using the above example, let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. During the next five years, you paid down $13,000 of your mortage debt.

As home prices fell and homes in your neighborhood went into foreclosure, your home's value dropped by 30 percent, or $54,000, to $126,000. Because the value of your home is less than the amount you owe, you have $41,000 in negative equity and would not be eligible for a home equity loan.

A home equity loan or line of credit allows you to borrow money, using your home's equity as collateral.

Wait. Don't click to another page. If the above paragraph seems like gibberish, you have surfed to the right place. We will explain what home equity is, what collateral is, how these loans and lines of credit work, why people use them, and what pitfalls to avoid.

First, some definitions:

Collateral is property that you pledge as a guarantee that you will repay a debt. If you don't repay the debt, the lender can take your collateral and sell it to get its money back. With a home equity loan or line of credit, you pledge your home as collateral. You can lose the home and be forced to move out if you don't repay the debt.

Equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have a home equity loan or line of credit).

Example 1

Let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. The day you buy the house, your equity is the same as the down payment -- $20,000: $200,000 (home's purchase price) - $180,000 (amount owed) = $20,000 (equity).

Fast-forward five years. You have been making your monthly payments faithfully, and have paid down $13,000 of the mortgage debt, so you owe $167,000. During the same time, the value of the house has increased. Now it is worth $300,000. Your equity is $133,000: $300,000 (home's current appraised value) - $167,000 (amount owed) = $133,000 (equity).