News about plummeting mortgage interest rates is recently making rounds on the internet. As a new homeowner, refinancing might come to mind especially if you’re struggling with your monthly payments. However, if you are not eligible for a cash-out refinance, you may instead consider getting a Home Equity Line of Credit or HELOC.
A Housing Wire August news article stated that according to analytics company Black Knight, 9.7 million homeowners could reduce their mortgage interest rate by 0.75 percent through refinancing at that time. The news comes after Freddie Mac’s data revealed mortgage rates hit a 3-year low of 3.6 percent. Lowering monthly mortgage payments, shifting an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, and cashing out on home equity are some of the popular benefits of refinancing.
But if you have an existing FHA loan and you’re planning to refinance, you may want to find out if you are still eligible to refinance once the new policy of the U.S. Department of Housing and Urban Development (HUD) took effect last September 1, 2019. The Federal Housing Administration (FHA) has taken measures to reduce the risk of cash-out refinance to homeowners. From 85 percent, the FHA lowered the maximum loan-to-value (LTV) requirements to 80 percent, in line with the Fannie Mae and Freddie Mac regulations. The new policy aims to, curb foreclosure risks to homeowners cashing out on their home equity, and at the same time, build investor confidence.
Taking a HELOC is an option you may consider if you have enough equity from your home and you want to cash it out as you normally do with a refinance. HELOC gives you a certain credit limit often set by a lender and you pay it back separately from your monthly mortgage.
7 key HELOC facts that you need to know
For some homeowners, taking a HELOC is a risky move especially if they cannot properly manage their finances. Here are the important HELOC facts that you need to know:
- HELOCs normally have variable interest rates. Your monthly payments may suddenly increase until the end of the credit line after a certain period of making small monthly payments.
- You’ll pay upfront closing costs like application fee, appraisal, title search, attorney’s fee, and points (a percentage of the amount you’re borrowing).
- Some lenders require HELOC borrowers to pay recurring fees like participation or annual membership fees. Some lenders also charge a fee when you borrow money.
- Your interest rate may still vary even if you don’t take out money from your HELOC account as you repay your credit.
- Some lenders may require you to pay a large amount (balloon) as you reach the end of your repayment term.
- The Truth in Lending Act of 1968 is a federal law that protects HELOC borrowers by requiring lenders to tell borrower-applicants the terms and costs of a loan plan. Borrowers must know the Annual Percentage Rate (APR) and all the associated fees of the loan.
- Borrowers are given a three-day window period after signing the loan to reconsider and cancel the deal without a penalty, but only if they use their primary home as collateral.
Unlike cash-out refinance, HELOC allows you to borrow up to 85% equity and you can immediately get funds in as little as 30 days after closing. You may find HELOC a better option if you don’t want to take advantage of the recent falling interest rates and you want to take out more money from your home equity.
If you highly consider getting a HELOC, shop and compare loan plans from three or more lending companies. Because your home secures the amount you borrow, it is critical that you pay your dues on time.