I can explain how home equity loans suppose to work; but in reality, the crash of the housing market has changed every aspect of this process
The way it is supposed to work:
Before the Housing Crash
The difference between the amount that is owed on the Mortgage Loan and the Appraise Value equal the Equity. The major factor is what the bank will lend you on your property. Depending on your credit score the bank may only lend you 80% of the appraised value or less. A Home Equity Line Of Credit is also known as a HELOC. You have an option about how much of the equity is used and when. Sometime you are given a checkbook to use when needed. The other form of using your equity is to get a second mortgage on your home in one lump sum.
You must understand all the terms of each type of equity loan especially the Reverse Mortgage. If you are over 62 years of age you might consider taking the equity out each month. Make sure you understand the options after death.
Terms are the most important facts. Terms are interest rate, time to payback loan, prepayment penalty, late fees, what would cause a default on loan, when the loan payment is late and the late fees, service charges, points/administrative cost to put the loan together, all and any other fees attached to the loan, and how often their loans are sold. Ask about making extra payments to pay off loan early. Also ask foreclosure procedures and the acceleration clause. The Acceleration Clause makes the whole loan become due immediately. The main term you need to know is how much of the equity you can get: 10%; 20% up to 80%. Most bank will not give the full equity; that’s why terms are very important. If you don’t understand ask the loan officer to explain them until you understand.
If you have a FHA or VA loan you can get a streamline loan to help reduce your payment. Most of the time there is no Appraisal or a drive by appraisal and under $2,500 to you. The benefit of this type of loan is to put more money in your pocket monthly by reducing your mortgage payment.
To summarize – the equity loan is based on the Appraised estimate and the amount owed on your property. Example: You owe $100,000 on your house and the Appraiser estimate the value of you house is $150,000. Your equity is $50,000. Of the $50,000 you can get a portion of that depending on the terms.
The second mortgage is a lump sum and the Home Equity Line of Credit (HELOC) is like a checking account attached to your equity. The Reverse Mortgage is similar to getting extra income every month.
FHA/VA has another option of a streamline equity loan that will reduce your monthly mortgage.
After the Housing Crash
NOW, let’s discuss the reality of equity loans with this upside down housing market.
It started with Adjustable Rates, Stated Loans, Balloon Payments and incompetent or greedy Loan Officers.
Loan officers saw an opportunity to make lots of money in an unregulated industry. In Ohio the Mortgage Industrial Commission decided to conduct a background check on Mortgage Loan Officers. Several could not continue legally to take loan applications because they could not pass the background check. Most of these Loan Officers were criminals and very uneducated. Can you imagine giving all your personal information to a criminal. That’s what was happening. I have heard people claim the public should have not got the loans in the first place. But the Loan Officers were suppose to be professionals. I just wanted to lay the foundation so you can understand why the depression is coming; because of the housing market crash.
Here is how it happened: in the hay day during the mid 80 the new fix loans came along. These loans were fixed for 2 years at a very low interest rate. The market went wild. The qualifications were relaxed to letting buyers purchase a house with a 480 credit score and one day out bankruptcy. The idea was that a person with a low credit score could get a mortgage and pay their mortgage on time for 2 years; their credit score goes up and refinance before the mortgage adjust up over 5 to 10 points and every six months to another 5 points where it would finally hit a ceiling. This has caused a collapse of our economy. Because the secondary market sold these bad loans across the globe to other countries there has been world financial chaos.
The Stated Loans should have been used for Independent contractors or the self-employed. These people make more money than what is on their tax returns because they write-off so much to pay less taxes. This loan is also good if a married couple who wanted to get a house and one of the spouses could not go on the loan for whatever reason. The household actual had more income that could be verified. So the Stated Loan was created to help the nail techs, barbers, hair stylist, real estate agents and other commissioned jobs. The greedy loan officer would put fixed income people into these loans and the dream home that they could not afford became a nightmare within months. Foreclosure came quickly.
The Balloon payments made the total mortgage come due after 7 years. If you can’t pay if off the mortgage then it’s time to get another loan; if your credit got worse you may face foreclosure.
Step by Step recap:
Purchaser get an Adjustable Rate Mortgage at 4% to adjust to 6% in two years 8% six months after that and 10% in another six months.
Purchaser credit score went down instead of up. Can’t refinance so they foreclosure.
Try to get loan modification
Save house from foreclosure
Hold on another six months
Adjustment again – can’t afford house note
Try to get Short Sale – sale house for less than what is owed
Try to sale house – but house appraise for less than what is owed. Can’t refinance or sale; so they just walk away.
Investor come along and buy the house for $30,000 less than what is owed. The banks at this point just want to make any amount of money. Banks are not in business to hold houses in their inventory.
The house’s value in the neighborhood go down.
So when your neighbor walks away from their house it will affect your house’s value.
I guess you are wondering why I explained the reality of the present and the Equity Loans. A very large amount of people will not be able to get an Equity Loan of any type because they are Upside Down in their Home Loan and there is NO EQUITY. The reason is because of incompetent or greedy loan officers.