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Home Equity Line of Credit or Mortgage?

kay asked:

I was transferred the family home shortly before my mom passed away. The house has no debt owed on it (but very high prop taxes). It’s in major need of repair (eg crazy plumbing leaks, outdated electrical), but I’m a recent college grad with a fair amount of loan debt & next to no cash to work with.

I’m try to decide between a mortgage b/c the interest rate would be fixed (or at least more stable) or a HELOC because I don’t want to borrow more than the cost of the repairs, but those are difficult to estimate up front.

My plan is to rent the home after the renovations to pay off the loan and other costs of the home, keeping the home as equity, while I live elsewhere.

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Tags: Equity Line Of Credit, Home Equity Line, Mom

2 responses to Home Equity Line of Credit or Mortgage?

Comment on Home Equity Line of Credit or Mortgage? (February 27th, 2011 at 02:27)

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The most honest answer anyone should be able to give would be is we don’t know. You need to speak to mortgage professionals in your area. Get pre-qualified. Compare the offers. As professionals we have software which can show you the dollars and cents math of your situation. Look to get it done in one transaction, with each refinance you spend your equity and owe a little more each time.

A Home Equity Line of Credit (HELOC) will cost less to establish. The danger is as you stated the Adjustable Rate feature. you will have 10 years of access to the line of credit but depending on you loan as little as 6 months of fixed interest. You payment will adjust be based on the amount drawn and the adjusted rate (index + margin). Be aware the lender by increasing you margin can make undisclosed bonus(yield spread premium).

If you opt for a fixed rate first mtg. and you borrow more than you need for the repairs you can always apply the unused portion to the principle. The differance is here even if you apply the unused portion to the balance you payment will remain fixed.

Will the rent cover your fixed mortgage payment? How often are properties vacant in the area? If you needed to make a payment because a tenant fails to do you have adequate reserves? Are there grants/ incentive programs in your area which will help you complete the repairs ans lessen your costs? The FHA 203k loan may be a good fit (this loan allowes you to finance the repairs and make adjustments to the budget as you go.)

Sorry for you loss, good luck. A little planning and shopping will get you where you need to be.

Note: Only let one mtg. company pull your credit make sure you get a copy and make any other mtg companies you speak to use it to work from initially. gett all offers in writting. Look at the Good Faith Estimate this will break down costs of doing the loan. The Truth in Lending this breaks down you payment scheduele and will give you terms of the loan, pre-payments assumability and the like. Find out based on the conditional approval what you will be required to provide to guarantee final approval and funding. If you are not going to be living in the home do no “fib” and finance the property as you primary residence: this is loan fraud and a felony. Besides the Loan to value wyou will be at should be very low and the adjustment will be negligible. I feel I should be giving you more information- but I’ve already written a book.

Again I’m sorry about your Mom and best of luck.

Edit: Rates have gone up over the last 3-4 weeks (anywhere from 1 to 1.25%). In fact, many lenders adjusted up today by .125%. Rates are hovering around 6.125% on 30 yr fixed conventional loans before any program adds. In regards to HELOC’S the current LIbor index is 2.99% and prime is 6.0%. Your margin will vary by lender, program and credit score.

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Home Equity Line of Credit or Mortgage?
Comment on Home Equity Line of Credit or Mortgage? (February 28th, 2011 at 19:27)

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Some good info on your last two answers so I will only add a few thoughts. Mortgage loan rates are dropping, not rising, so locking yourself into a fixed rate now could cost you later. I suggest you speak with an accountant, tax advisor, or financial expert to help you crunch the numbers.
My suggestion: Get estimates first on the repairs, get a HELOC now as this can be done at little and usually no cost to you. Investigate the amount of rent you can reasonable receive as income of the property. Your HELOC rate will be adjustable, but again, rates are going down not up and the amount you are taking out for repairs + other costs such as prop. taxes should be much less than what you receive in rent.
Contact me via email and I will help you more with some great strategies.

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Home Equity Line of Credit or Mortgage?