VA loans: how they work, who is eligible

VA loans are intended for current service members as well as veterans and qualifying spouses. These mortgages have competitive interest rates and generally do not require a down payment.

If you’ve been in the military and needed a mortgage, a VA loan may be right for you, whether you’re buying a home or refinancing yourself. You should know that.

What is a VA loan?

A VA loan is a mortgage guaranteed by the United States Department of Veterans Affairs (VA) and issued by a private lender, such as a bank, credit union, or mortgage company. A VA loan can make buying a home easier because there is usually no down payment required.

Only qualified U.S. veterans, serving military personnel, and certain surviving spouses are eligible for VA loans. The GI Bill of Rights created the VA Home Loan Program in 1944 to help veterans settle into civilian life after World War II.

How Does a VA Loan Work?

The VA guarantee means that the government will reimburse part of a VA loan to the lender if the borrower fails to make the payments. This guarantee reduces the risk for lenders and allows them to offer advantageous terms and not require a down payment.

If you are eligible, you can complete the VA mortgage application process through a lender of your choice. Many, but not all, lenders offer VA loans, and some lenders specialize in serving VA borrowers.

Who Can Get a VA Home Loan?

You are likely eligible for a VA mortgage if:

You are active-duty military or veteran who meets the requirements for length of service.

You are the surviving spouse of a member who died while on active service or due to a service-related disability and who has not remarried or remarried after the age of 57 or on December 16, 2003. Spouses of prisoners war or missing soldiers are also eligible.

Meet the lender’s credit and income requirements. The VA does not set a minimum credit score for VA loans, but lenders can set their own minimum standards. The lender will also consider your income and debts to assess your ability to pay the mortgage.

The property you wish to purchase meets safety standards and building codes and is your primary residence.

To prove that you qualify for military service or surviving spouse, you must obtain a VA title before you complete the loan. You can ask a VA approved lender to get the document for you, or you can request the certificate through the VA.

VA loan services

Here are the main advantages of VA loans over conventional and FHA loans:

No Down Payment or Mortgage Insurance Required: Other types of loans require down payments and may include additional mortgage insurance fees. FHA loans require mortgage insurance regardless of the amount of the down payment, and traditional loans generally require mortgage insurance if the down payment is less than 20%.

Competitive Interest Rates: According to mortgage data provider Ellie Mae, the 30-year average mortgage rates for VA mortgages were lower each month in 2019 than for FHA and conventional mortgages.

Limited closing costs: Closing costs are the various fees and expenses that you pay to get a mortgage. The Department of Veterans Affairs limits the lender’s origination fee to no more than 1% of the loan amount and prohibits lenders from charging other closing costs.

Disadvantages of VA Home Loans

Each type of loan has drawbacks for some borrowers. Here are the possible disadvantages of a VA loan.

VA Loan Funding Fees: While no mortgage insurance is required for VA loans, there are additional costs known as finance charges. The federal government sets the fees and bears the execution costs if the borrower has no arrears. The fees range from 1.4% to 3.6% of the loan, depending on your down payment and whether this is your first VA loan. You can pay the fees upfront or double the loan.

Buy Principal Home Loans Only: You can’t buy an investment property or vacation homes with a VA loan.


Standard tax deduction: how much does it cost in 2019-2020 and when?

In 2019, it is $12,200 for single and married applicants submitting separately, $ 24,400 for married applicants submitting together, and $ 18,350 for heads of households. It will be higher in 2020.

The standard deduction reduces your taxable income. In 2019, the standard deduction is $12,200 for single and married registrants submitting separately, $24,400 for married registrants submitting together, and $18,350 for household administrators.

As of 2020, the standard deduction is $12,400 for single and married applicants submitting separately, $24,800 for married applicants submitting together, and $18,650 for household managers.

How the standard deduction works

Even if you don’t have other allowable deductions or tax credits, you can use the IRS to make the standard deduction without asking questions. The standard deduction reduces the amount of income on which you have to pay taxes.

You can make the standard deduction or report it on your tax return. he cannot do both. Breakdown deductions are basically IRS approved expenses that can reduce your taxable income.

If you use the standard deduction, you cannot deduct the interest on the mortgage or make many other common tax deductions eg. B. Medical expenses or charitable donations. (However, if you are making a list, you must keep records that support your deductions if the IRS decides to examine you.)

When should the standard deduction be claimed?

Here’s the gist: If your standard deduction is lower than your breakdown deductions, you should probably list them and save some money. If your standard deduction is greater than your individual deductions, it may be useful to use the standard deduction and save you time.

Try this quick check. While using the standard deduction is easier than signing up, you should check with a mortgage or real estate loan to see if signing up saves you money. Use the numbers you find on IRS Form 1098, Mortgage Declaration of Interest (usually available from your mortgage lender at the end of the year). Compare the amount of your mortgage interest deduction to the standard deduction. Property taxes, income taxes or sales taxes, and charitable donations can also be deducted if you indicate this.

Run the numbers back and forth. If you are using tax software, it is probably worth answering all of your questions regarding the one-time deduction. Why? The software (or your tax advisor) can run your tax return back and forth to determine which method results in reduced tax burden. Even if you take the standard deduction in the end, you at least know you’re going to get ahead.


Make a down payment for your home without ruining your finances

You need to weigh the benefits of increasing your deposit against the need to withhold money for upgrades and emergencies.

Maximizing a down payment for a house can make sense: the higher the down payment, the lower the monthly mortgage bill, and the faster the capital builds up.

However, if you leave too much of it on the floor, you might not have enough money to maintain your house or anything.

To find the right amount, you need to balance the benefits of increasing your down payment with the need to save money for urgent updates, life’s emergencies, and the enjoyment of your new home.

“There really is no one-size-fits-all solution,” said Jason Speciner, a certified financial planner in Fort Collins, Colorado.

Impact of a higher down payment

The number of down payments affecting a monthly mortgage payment is significant. Some lenders only require a 3% down payment on traditional home loans, which makes it easier to get started, but means getting into more debt than larger down payments.

Many borrowers wonder if they should get a little more together, around 5% versus 3%, says Rick Bechtel, head of U.S. home loans at TD Bank. But that probably wouldn’t make enough of a difference in monthly mortgage payments to justify getting you in trouble, he says.

“The need for money after graduation is more and more important and sometimes much greater than expected,” he says.

However, a larger down payment can make a significant difference if mortgage insurance is reduced or avoided. Insurance, which can include prepayments and monthly fees, protects the lender when the borrower doesn’t pay. Depending on the type of loan, a larger down payment can eliminate some, if not all, of these costs.

Kristin Phillips, the psychologist from Tampa, Fla., And the author of The Debt Shrink blog says she and her husband Brandon couldn’t leave the traditional 20% but wanted to leave more than the minimum when they bought a home. In 2013.

“Ten percent was a good compromise,” she says. This kept the monthly mortgage below 25% of their income so they could live comfortably. Over time, they made additional mortgage payments to raise enough capital to abolish private mortgage insurance.

Borrow carefully

When deciding on the amount of the advance, consider its impact on other aspects of your budget.

According to the 2018 Bank of the West Millennial study, 29% of homeowners between the ages of 21 and 34 took out loans from a retirement account to fund down payments.

However, the decision should not be taken lightly. Borrowing from a 401 (k) is particularly risky. After losing a job, the loan must be paid on the next tax filing date or taxed as ordinary income with a 10% penalty if the payment is made 59 and a half years ago.

Using a Roth IRA to increase your down payment is a better option, says Aaron Clarke, a certified financial planner and financial advisor at Halpern Financial in Ashburn, Virginia. There are no taxes or penalties for withdrawing contributions. First-time buyers who have contributed to a Roth for at least five years can withdraw up to $10,000 in contributions, excluding taxes and penalties.

However, Linda Rogers, a certified financial planner and owner of Planning Within Reach in Memphis, Tennessee, does not recommend taking out old age credit. Still, many people are behind in savings, he says, and borrowing from an IRA means losing growth tax-free.

Expect the unexpected

34% of first-time buyers say that after buying their current home, they no longer feel financially secure after buying their current home. This emerges from the 2019 NerdWallet Homebuyers Report, which is based in part on a survey of 2,029 adults from the Harris Survey for NerdWallet.

To ensure safety, you shouldn’t be spending your savings on down payment and closing costs. Leave a little for emergencies, like a car breakdown.

Expect the unexpected

34% of first-time buyers say that after buying their current home, they no longer feel financially secure after buying their current home. This emerges from the NerdWallet Homebuyer Report 2019, which was in part based on a survey of 2029 Erwa.


Mortgage closing costs: what are they and how much will you pay

Mortgage closing costs are between 2% and 5% of loan costs, including property taxes, mortgage insurance, and more.

After saving for a deposit, looking for a home, and applying for a mortgage, closing costs can be a nasty surprise.

Knowing what closing costs and budgeting are covered will make the last part of the home buying process easier.

What are the closing costs?

Closing costs include the myriad of fees for services and expenses required to take out a mortgage. You have to pay the closing costs whether you buy or refinance a home.
Most of the closing costs are the buyer’s responsibility, but the seller usually has to pay a portion as well, such as the real estate agent’s commission. (Buying a home for the first time? Read our tips for first-time buyers.)

How much are the closing costs?

The average closing cost for the buyer is between 2% and 5% of the loan amount. This means that if you buy a house for $300,000, you are paying $6,000 to $15,000 in closing costs.

The cheapest way to cover your closing costs is to make a one-time payment out of pocket. You may be able to finance them by doubling them on the loan if the lender allows. However, you then pay interest on these charges over the life of the mortgage.

When buying a home, you can shop around and negotiate certain prices to lower your closing costs. Some states, counties, and cities offer grants or low-interest loan programs to help first-time buyers make the purchase. Check with your local government what is available.

Your lender should describe your closing costs in the credit estimate you receive when you first apply for a loan and in the closing document you receive in the days leading up to the agreement. Read them carefully and ask questions about anything you don’t understand.

Here are the rates the buyer’s closing costs may include:

Real estate costs

Appraisal Fee – It is important for a lender to know if the property is worth as much as the amount you wish to borrow. There are two reasons for this: the lender should check that the amount needed for a loan is justified, and ensure that you can get back the value of your home if you fail to honor your loan. The average cost for a home appraisal by a licensed professional appraiser is between $ 300 and $ 400.

Home Inspection: Most lenders require a home inspection, especially if you get a state-guaranteed mortgage, such as an FHA loan insured by the Federal Housing Administration. Before a bank will lend you hundreds of thousands of dollars, it needs to make sure the house is structurally sound and in good repair. If the inspection produces worrying results, you may be able to negotiate a lower selling price. However, depending on the severity of the issues, you may have the option of terminating your contract if you and the seller cannot agree on how to resolve the issues. Home inspection fees average between $300 and $500.

Loan fees

Application Fee: These cover the cost of processing your new loan application and include fees such as credit checks and administrative fees. Application fees vary depending on the lender and the amount of work required to process your loan application.

Failure Fee: If the seller has a potential mortgage and you take over the remaining loan amount, you may be charged a variable fee based on the remaining amount.

Legal fees: In some states, an attorney must be present when purchasing a property. The rate depends on the number of hours the lawyer works for you.

Prepaid Interest: Most lenders require buyers to pay interest accrued between the settlement date and the due date of the first monthly mortgage payment. So be prepared to pay this amount when you are finished. It depends on the amount of your loan.

Loan Formation Fee – These are significant fees. Also called subscription fee, administration fee, or processing fee. The loan creation fee is a lender’s fee for evaluating and preparing your mortgage. This may include the preparation of documents, notary fees, and attorney fees.


How Often Can You Refinance Your Mortgage?

Can refinance your home as often as it pays off. When charging, you may have to wait six months between refills.

He was convinced that refinancing his home was the right thing to do the first time around. You may have even refinanced the mortgage since. And yet, in your situation and with the interest rates they are at, you are trying to refinance again.

How Often Can You Refinance Your Mortgage? Can you really get too much good?

You may have to wait for refinancing

There are many reasons to refinance your mortgage, possibly to get a better interest rate or to change the term of your loan or to convert a variable rate loan to a fixed rate. Or you want to refinance with cash by taking out loans against the accumulated value of your home to pay for renovations or other things.

The point is, you can refinance as often as you like, but some lenders look for a “spice” period between home loans or a period of time between appraisals.

There are no standard spice requirements for refinancing interest rates and maturities, although some lenders may require it, ”said Ray Rodríguez, regional director of mortgage sales at TD Bank in New York. “The industry standard for retirement refinancing is six months.”

A penalty for prepaying your current mortgage may be the only other barrier to refinancing. According to Rodríguez, the regulations “prevent” banks or mortgage providers from offering mortgages with prepayment penalties.

A penalty for prepaying your current mortgage may be the only other barrier to refinancing. “


“A homeowner can refinance their mortgage as many times as they want, but they have to set goals and find a product that matches their unique financial situation,” Rodríguez said. “For example, a short-term loan has a lower interest rate than a 30-year fixed-rate loan, but the payment is higher because you pay faster.”

It’s just a matter of assigning the numbers to a refinance to determine if it is right for you, no matter how many times you’ve refinanced before.

This couple refinanced their house twice a year

Holly and Greg Johnson, who lived in central Indiana in 2016, refinanced their home twice a year. How does it work?

“We initially refinanced a 30-year mortgage from 6.5% to 5.25% because the savings were worth it,” said Holly Johnson. “Then we refinanced again for a 15-year loan at 3.25% as soon as interest rates hit such a low level. This time we did a free refinance so we didn’t pay any closing costs. If I remember correctly, we could have received a loan of 2.75% over 15 years, but we chose 3.25% to avoid our closing costs. Again the savings were there when we did it, so it was totally worth it. “

Like many young couples, the Johnsons bought their homes with a small down payment. Less than 20% of the principal (the amount paid versus the loan amount) meant they had to take out private mortgage insurance that protects the lender from losses.

With the lowest interest rate and shortest loan term since the first refinance, combined with additional payments for the principal, the couple quickly grew by over 20% of the principal. When they refinanced again, the Johnsons ditched their private mortgage insurance requirements, saving an additional $135 per month.


Private mortgage insurance (PMI): an overview

You have already researched, observed the real estate market, and now is the time to bet on your perfect home. As you go through the final stages of the mortgage approval process, you (and most other homebuyers) will likely find a new term: private mortgage insurance or PMI. Let’s take a look at PMI, how it works, how much it costs, and how to avoid it.

Private mortgage insurance (PMI) is insurance coverage that homeowners must have if they pay less than 20% of the cost of the home. Basically, PMI offers mortgage lenders a backup when a home is foreclosed because the homeowner has not been able to make their monthly mortgage payments.

Most banks don’t lose money, so they did the math and found that if they were foreclosed, they could recover about 80% of the value of a house if the buyer fell behind and the bank had to confiscate the house. To protect themselves, banks ask buyers to pay an insurance policy, the PMI, to compensate for the remaining 20%.

How does it work?

The PMI is a monthly insurance payment that you make when you deposit less than 20% at your home. It is not an optional form of mortgage insurance, like some other mortgage insurance plans that you may have seen. Here’s how it works:

Once the PMI is required, your mortgage lender will do it through their own insurers.

At the start of the mortgage process, you will be told how many PMI payments you will need to make and for how long, and will pay them monthly in addition to your mortgage principal, interest, and other fees.

You will stop paying the PMI the day your lender calculates that the principal amount of your mortgage will reach 78% of the original appraised value of your home. After that, the PMI stops and your monthly mortgage payment goes down.

The PMI does not in any way cover your ability to pay your mortgage. It protects the bank because they give you more than 80% of the sale price! Once you have to pay the PMI, you will no longer be able to pay these insurance premiums to the bank, whether or not you comply with them and go into foreclosure.

How to get rid of PMI

Now the good news! There are a few things you can do to say goodbye to PMI.

1. Pay extra for your mortgage each month

You could overpay your mortgage each month and get to the point where you owe 80% or less. However, this could be quite complicated since you will have to find extra money each month.

Take our example above and pretend you could pay an extra $25,000 in a few years. Why not wait to buy the house and save about a year? Then you could buy the dream home for $250,000, make a 20% deposit and completely avoid the PMI!

2. Get a new home appraisal

Keep an eye on the value of your home If you end up having more value than last year (for example, because more people are moving to the area), it means more justice on your behalf. Ask your lender for a new appraisal if you think that the value of your home has increased so much that your capital increases by more than 20%. As long as you owe less than 80% of the new assessment, you can write to your mortgage lender and request that the PMI be terminated.2 However, it is up to you to pay for the new assessment and follow the appropriate steps if you request the lender to do it. finish early.

If you let your house be evaluated after a few years and pay a little more for your mortgage payments each month, you can reach this magic 80/20 threshold much faster and that means big savings!


5 facts about working with a mortgage broker

A mortgage broker handles the process for you by applying for loans from various lenders, determining competitive interest rates, and negotiating the loan terms.

You’ve narrowed down your search for the home of your dreams and are now looking for the best mortgage to take those keys into your own hands. One way to do this is to work with a mortgage broker who can walk you through the loan process from start to finish.

You’ve probably heard the term “mortgage broker” from your real estate agent or friends who have bought a home. But what is a mortgage broker and what does someone else do, like a loan officer in a bank?

1. What is a mortgage broker?

A mortgage broker acts as an intermediary between you and potential lenders. The broker’s job is to work with multiple banks on your behalf to find mortgage lenders with competitive interest rates that best meet your needs. Mortgage brokers have a well-developed group of lenders that they work with which can make your life easier.

Mortgage brokers are licensed and regulated financial professionals. You do a lot of the prep work, from collecting your documents to extracting your credit score and verifying your income and employment. They use this information to apply for loans from various lenders in a short period of time.

2. How is a mortgage broker paid?

Mortgage brokers are often paid by lenders, sometimes by borrowers but never by both, says Rick Bettencourt, president of the National Association of Mortgage Brokers. Lender-paid compensation plans pay brokers 0.50% to 2.75% of the loan amount, he says.

You can also pay the broker yourself. This is called “the compensation paid by the borrower”.

“When you buy a mortgage broker, you want to ask them, ‘What is your lender compensation rate [and] what is your borrower compensation rate,” Bettencourt explains. “You could be at the same pace. But you have to do your due diligence [and shop around].”

The competitiveness and prices of real estate in your local market affect brokerage fees. In coastal areas, cities, and other markets in the country with high-quality real estate, brokerage rates can only be 0.50%. In the other direction, however, federal law limits the amount of compensation.

“Under Dodd-Frank … runners cannot earn more than 3% in points and fees,” Bettencourt says. This restriction was included in the Financial Regulation Act due to irregular lending which triggered the housing collapse. Originally applied to mortgages of $ 100,000 or more, although this threshold has increased with inflation.

3. What distinguishes mortgage brokers from loan officers?

Loan officers are employed by a lender and receive a fixed salary (plus bonuses) for lending to that lender.

Mortgage brokers who work in a mortgage brokerage firm or who work independently with many lenders and get most of their money from fees paid by the lender.

4. Is a Mortgage Broker Right for Me?

A mortgage broker, on your behalf, applies for loans from various lenders, buys competitive mortgage rates, and negotiates the terms.

You can also save time by using a mortgage broker. Applying for different loans can take hours. Then, two-way communication is required to sign the loan and ensure the transaction stays on track. A mortgage broker can save you from having to deal with this process.

However, when choosing a lender (broker, bank, online, or otherwise), you should pay special attention to the lender’s fees. In particular, ask what fees appear on page two of your loan estimate form in the “Loan Costs” section under “A: Original Fees”.

Then take the loan estimate you get from each lender, line it up, and compare the interest rate and all closing fees and costs.

This direct comparison of prices between different options is the best way to make the right decision for one of the possibly most important purchases of your life.

5. How do I choose a mortgage broker?

The best way is to ask friends and relatives for recommendations, but make sure they’re actually walking down the hall.


Advantages and disadvantages of cash refinancing

Refinancing with cash is a great way to pay for home improvement. Other uses can put your home at risk.

What is cash withdrawals refinancing?

Cash refinance replaces your existing mortgage with a new home loan for more than what you owe your home. The difference is money for you and you can spend it on home improvement, debt consolidation, or other financial needs. You must have equity in your home to be able to refinance cash withdrawals.

Instead, traditional refinancing replaces your existing mortgage with a new mortgage for the same balance. How cash withdrawals refinancing works:

  • He pays you the difference between the mortgage balance and the value of the house.
  • It has slightly higher interest rates due to a higher loan amount.
  • The payment limits are 80% to 90% of the equity in your home.

In other words, you cannot extract 100% of the equity in your home. If your home is worth $200,000 and your mortgage balance is $100,000, you have $100,000 of equity in your home. You can refinance your $100,000 balance to $150,000 and receive $ 50,000 in cash at the end to pay for the renewals.

Benefits of refinancing cash withdrawals

Lower Interest Rate: Mortgage refinancing typically offers a lower interest rate than a Home Equity Line of Credit or HELOC or Home Equity Loan.

Refinancing cash withdrawals can result in a lower interest rate if you originally purchased your home when mortgage rates were much higher. For example, if you bought in 2000, the average mortgage rate was around 9%. Today it is significantly lower. However, if you just want to put a lower interest rate on your mortgage and don’t need cash, regular refinancing makes more sense.

Debt Consolidation: Using money from a cash withdrawal refinance to pay off high-interest credit cards can save you thousands of dollars in interest.

A Higher Credit Score: If you fully pay off your credit cards with cash withdrawal refinancing, you can increase your credit score by lowering your loan utilization rate and the amount of available credit you use.

Tax Deductions – The mortgage interest deduction may be available in retirement refinancing if the money is used to buy, build, or significantly improve your home.

Disadvantages of a cashback

Risk of foreclosure: Since your home is collateral for all types of mortgage, you risk losing it if you can’t make the payments. When you refinance cash to pay off credit card debt, you are paying off unsecured debt with secured debt. This step is generally frowned upon as your home can be lost.

New terms: Your new mortgage has different terms than your original loan. Check your interest rate and fees before agreeing to the new terms.

Closing Costs – You pay the retirement refinancing closing costs just like any refinance. The closing costs are typically 2% to 5% of the mortgage, or $4,000 to $10,000 for a loan of $200,000. Make sure your potential savings are worth the cost.

Private Mortgage Insurance: If you borrow more than 80% of the value of your home, you must pay for private mortgage insurance. For example, if your house is worth $ 200,000 and you refinance more than $160,000, you will likely have to pay the PMI. Private mortgage insurance typically costs 0.55% to 2.25% of your loan amount per year. A 1% PMI for a $ 180,000 mortgage would cost $1,800 per year.

Allow bad habits: Using a refi cash withdrawal to pay off your credit cards can backfire if you succumb to the temptation and increase your credit card balance again.


A home loan or retirement pension refinancing: ways to use the value of your home

A home loan and cash refinance are two ways to access the equity in your home. The best option depends on interest rates.

A home loan and cash refinance are two ways to access the equity in your home. Although the loans are similar, they are not the same. If you already have a mortgage, a home loan is a second payment, while cash refinancing replaces your current loan with a new term, a new interest rate, and a new monthly payment.

Use for home loans and refinancing cash withdrawals

Buying a home is often presented as a “mandatory savings account”. A monthly loan payment along with any property appraisal creates value in the home. However, you cannot access this value called capital without selling it. Instead, you need to borrow the capital that you can earn with these credit products.

Of course, you need to have some home equity first.

“If you’ve recently bought your home, you might not have much to do. If you’ve owned your home for five to ten years and made your payments on time, you’ll have more equity in your home, ”said Johnna Camarillo, vice president of the Navy Federal Credit Union.

To determine your home equity, find out how much your home is worth and how much you still owe on the mortgage. If the difference between the two is a positive number, it is the equity you have in the home. However, if you owe more than the value of your home, you are not a candidate for retirement refinancing or a home loan.

How loans are similar

Both usually come with fixed interest rates, although adjustable interest rates are possible with repayment.

Typically, you need a post-transaction credit value ratio of 90% or less to qualify for either.

You will receive a lump-sum payment for both products

How are loans different

Interest rates for cash refinancing are generally lower than for home loans. According to Camarillo, lenders often pay all or most of the cost of taking out a home loan. This is not the case with most cash withdrawals. A refi is a great loan, while a home loan is a loan on top of your first mortgage.

Frequently Asked Questions About Getting A Home Loan vs. Refinancing

Is It Better To Refinance Or Home Loan?

First, consider mortgage rates.

“If a customer can lower their interest rate on their entire first mortgage and then withdraw additional cash,” Camarillo is considering a cash withdrawal refi.

If the current interest rates are higher than the interest rates on your existing mortgage, a home loan will likely make more sense.


In general, it is a little easier to qualify for retirement. They replace your primary mortgage. Lenders like it because it gives them the “number one position” as a creditor.

In general, it is a little easier to qualify for retirement. 

Home loans are “second mortgages” which means that the loan is second in terms of repayment priority.

And it is worth buying both loans to get the best interest rate and the best terms. You don’t need to contact your current mortgage lender for either of the two products.

How much can you lend?

“When mortgage options are guaranteed, the amount a person can borrow is usually determined by things like home equity, credit rating, and debt-to-income ratio. says PK Parekh, vice president of Discover Home Equity Loans.


HELOC: Understanding Home Equity Lines of Credit

With a Home Equity Line of Credit (HELOC), you can take out loans against the value of your home to access cash when needed.

What is a capital line of credit?

A home equity line of credit (HELOC) is a second mortgage that gives you access to cash based on the value of your home. You can take money out of a home equity line of credit and pay it off in whole or in part on a monthly basis, like a credit card.

With a HELOC, you borrow against your principal amount, which is the value of your home minus the amount you owe for the primary mortgage. You can also get a HELOC if you own your home directly. In this case, HELOC is the primary mortgage instead of a second.

Whether a HELOC is a secondary or primary mortgage, you can lose the home through foreclosure if you fail to make the payments.

How does a home equity line of credit work?

Like a credit card that lets you borrow within your spending limit as often as needed, a HELOC gives you the flexibility to borrow, pay, and repeat against your home equity.

Most HELOCs have adjustable interest rates. This means that as your benchmark rates go up or down, your HELOC rate will adjust as well.

To set your interest rate, the lender starts with an indexation rate and then adds a margin based on your credit profile. As a general rule, the higher your credit rating, the lower your profit margin. This margin is called the margin. You must request the amount before unsubscribing from HELOC.

Variable interest rates make you vulnerable to rising interest rates. So keep that in mind. Look at the size of the periodic limit, how much the interest rate can change at any time, and the lifetime limit, the highest interest rate you can calculate over the life of the loan, to get a feel for the height of the interest rate. Could your payments get?

On the plus side, like a credit card, you only pay interest on the amount of money you use, not the total amount available to borrow.

How to get a home equity line of credit

The process of obtaining a HELOC is similar to that of a purchase mortgage or refinance. It will provide some of the same documentation and show that it is a solvent. Here are the steps you will follow:

  • Use a HELOC calculator to determine if you have enough capital.
  • If you have an idea of ​​what you can borrow, buy from HELOC lenders.
  • Gather the necessary documentation before making the request so that the process runs smoothly.
  • Once you have gathered your documents and selected a lender, apply for HELOC.

You will receive the disclosure documents. Please read them carefully and ask questions of the lender. Make sure HELOC meets your requirements. For example, do you have to borrow thousands of dollars upfront (often called an initial drawing)? Do you need to open a separate bank account to get the best price for HELOC?

The subscription process can take hours or weeks and include an appraisal to confirm the home’s value.

The last step is to close the loan when you sign the documents and the line of credit is available.

How much can you borrow with a HELOC?

The maximum amount of your home loan line depends on the value of your home, what percentage of that value the lender gives you to borrow, and how much you still owe on your mortgage. Two quick calculations can give you an idea of ​​what you can borrow with a HELOC.