Tapping into your home equity means taking out a home equity loan. Generally, you have 2 options. You can use a fixed loan or a HELOC. The HELOC is a home equity line of credit. It works much like a credit card. You get a specific line of credit you can use. As you use it, you must pay the interest back. If you pay the principal back, you can reuse the line. What if you need 100% of the equity in your home? Can you take out a 100% LTV HELOC? We discover the answer below.
Finding a Lender for 100% LTV
The short answer is “yes” you can get a 100% LTV loan. The long answer is, you must find a lender. Your traditional banks usually cap HELOCs at 80%-90% of the equity. Just like any other loan, though, you can shop around. There are many types of lenders available today. Your large, well-known banks may cap the loan. Local or smaller banks, however, may offer 100% loans. Calling around and searching the internet can help you find a lender.
Why There’s a Problem
100% LTV HELOCs were the norm a few years back. Borrowers used the funds for a variety of things. Some paid off credit cards; others improved their homes, and others did whatever they wanted with the funds. Unfortunately, the loans weren’t closely monitored, or monitored enough. Not every borrower taking out 100% equity could afford it. Sure, they could afford the interest payments. When the principal became due, though, they suffered. Today, lenders tightened the reins. This helps prevent further problems.
Do You Need a HELOC?
Before you take out 100% of your equity, consider what you need. First, ask yourself, do you need a HELOC? There are other options including:
- Cash-out refinance – This refinances your first mortgage while taking cash out of the equity of your home. You receive a fixed amount and can’t reuse the funds.
- Home equity loan – This is a second loan but with a fixed amount. You receive the full disbursement at the closing. You can’t reuse the funds.
Some borrowers need a HELOC, though. What you need the funds for will determine how you proceed. Do you have a one-time need for the funds? If so, a cash-out refinance or home equity loan may work. This way you take the temptation out of reusing the funds.
If you see yourself needing the funds more than once, then the HELOC may be necessary. Keep in mind, though, you can only use the funds for 10 years. The next phase is the repayment phase. This is when you pay principal and interest.
HELOCs Have Rising Interest Rates
Unlike 1st mortgages and home equity loans, HELOCs have variable interest rates. You won’t know your interest rate from month-to-month. Your payment could increase or decrease, depending on the market. Many borrowers rely on the low introductory rate, thinking they can afford the payment. When the rates suddenly rise, though, some borrowers find themselves in trouble.
Home Values May Decrease
We all saw it happen already. Home values plummeted right before our eyes. It could happen again. No one can predict what will happen. If you have HELOC with 100% LTV, you could be upside down on your loan. This means you owe more than the home is worth. Even if you can afford the payments, you may feel stuck in the home. Unless this is your “forever” home, this could be a problem down the road.
Determining How Much You Can Borrow
Determining how much you can borrow is simple. You just need 2 facts:
- Current value of your home (via an appraiser or real estate professional)
- Outstanding amount of your first mortgage
You can determine the equity in your home with the following equation:
Current value of your home – Outstanding value of your first mortgage = Equity in the home
You can then determine the amount of HELOC based on your LTV. Obviously, a 100% LTV loan would equal the amount of equity in the home. If you want only a portion of the equity, multiply the equity from the above equation by the LTV. For example, a 90% LTV looks like:
Equity in home x .90 = Amount of a 90% LTV Home Equity Loan
Qualifying for a HELOC
If you need 100% of the equity in your home, be prepared with good qualifying factors. The higher your credit score and lower your debt ratio, the better. There aren’t published minimums or maximums. Each lender has their own requirements. In general, though, the more financially responsible you look, the better your chances of approval.
HELOC borrowers do have a benefit, though. You aren’t qualifying for a first mortgage. You can already show you pay your mortgage on time. You also have the home as collateral already. But, lenders must make sure you can afford the extra payment. You should show stable employment and reserves, if you can. These can provide compensating factors that lenders can consider when determining your eligibility.
Should you take out a 100% LTV HELOC? It depends on your circumstances. Some borrowers are perfectly fine with this type of loan. They can afford the interest payments. Some even pay the principal bank right away. Others see the equity in their home and want it. They don’t think of the consequences, though.
Before you take out a HELOC, really consider why you need it. This way you can determine the right choice. Consider your other options first, including a cash-out refinance or home equity loan. Compare each option side-by-side. HELOCs may have fewer fees than your other options. But, it carries the risk of increasing interest rates. Think of how long you need the loan and your plans for the future. Then you can decide which option works the best for you.
No matter what you decide, make sure you shop with several lenders. This way you can secure the best deal for you.