Q. What is a Home Equity Loan (or 2nd Mortgage)?
A. A Home Equity Loan is for those who have "equity" in their home that may be used as collateral for a loan. The equity is the difference between any existing liens (debts) and the market value of the home.
Q. What types of Home Equity Loans does AmeriCU Credit Union offer?
A. We offer two Home Equity Products:
- Home Equity Installment Loan and (sometime referred to as a "Closed-End or Fixed Rate" loan)
- Home Equity Line of Credit (sometime referred to as a "HELOC")
Q. What is a Home Equity Installment Loan?
A. A Home Equity loan (referred to as a "traditional" home equity loan) is a closed-end (fixed) loan, extended for a specific length of time, that requires repayment of interest and principal in equal monthly payments. Installment payments pay off the entire loan balance within a specific timeframe (5, 10 or 15 years). This product features a fixed interest rate and your home serves as collateral for the loan.
Q. What is a Home Equity Line of Credit (HELOC)?
A. A Home Equity Line of Credit (HELOC) is a form of revolving credit that permits borrowing at your discretion up to the amount of the credit line. Your primary residence serves as collateral. The HELOC features a variable interest rate (based on the prime rate published in The Wall Street Journal) with a draw period of 10 years (interest-only payments years one (1) through five (5); 1% of balance required years six (6) through ten (10)) and a total repayment period of 25 years. Many homeowners use a HELOC for purposes such as debt consolidation, tuition, and home improvements.
Q. What is the difference between the two Home Equity products?
A. The differences are:
- Home Equity Installment Loan - You receive the full amount of the loan at your loan closing. Repayment occurs in regular fixed monthly payments. This loan has a fixed interest rate with a maximum term of 15 years.
- Home Equity Line of Credit (HELOC) - features the flexibility of a line of credit to access cash as needed. This loan has a variable rate providing access to a credit line for up to 10 years. At the end of the draw period, the loan converts to a fully amortized 15-year term, and no longer offers the interest-only payment option. The rate during the 11 to 25 year repayment period will still remain variable (Prime + 0.25% or Prime + 0.00%).
Q. What can I use a home equity loan or line of credit for?
A. Just about anything!
Debt consolidation – Many borrowers use a home equity loan to consolidate credit card debt into one payment with much lower interest rates. Doing so can reduce your monthly interest charges, allowing you to save or invest that much more. Making monthly payments more manageable may also improve your credit rating.
- Home improvements – Upgrading or repairing your home has many benefits such as making the home safer or more comfortable, and increasing the fair market value of the home. Kitchen improvements raise the value the most, returning 94 percent of your investment, followed closely by additional bathrooms, family rooms and second-story additions.
- Education – A loan used for college or technical school tuition can pay for itself several times over if it helps you or a family member secure a better job. Many borrowers turn to home equity because they haven’t saved enough money to pay tuition expenses, and their incomes are too high to qualify for some grants or government-backed loans. (You might want to check out AmeriCU's StudentChoice loans too!)
- Big-ticket purchases, medical expenses or emergencies – Possible tax advantages and lower interest rates make home equity loans a smart way to finance a new car, motorcycle or other high price purchases. Also an equity loan may be beneficial if you are faced with costly medical bills or other unplanned expenses.
- Pay off a current mortgage or other loans – To refinance at a better rate can save hundreds - sometimes thousands - of dollars over the life of a loan.
Q. Why are home equity loans so attractive?
A. Borrowing against the value of a home has increased dramatically in popularity, for two key reasons: lower interest rates and tax deductibility. Although many of our members have been using home equity loans for years, the appeal to homeowners was heightened by the Tax Reform Act of 1986, which mandated the phase-out of federal income tax deductions for interest paid on non-mortgage consumer debt. With the change in tax law, mortgage debt (on which the interest remained tax deductible) became more attractive to consumers for funding debts that previously were financed through auto loans, credit cards, etc.
Q. What does the term "Equity" mean?
A. Equity is the value of your home that you own outright. Equity is the difference between the existing liens or unpaid mortgage debt and the market value of the home. A homeowner’s equity increases as he or she pays off the mortgage or as the property appreciates (grows) in value. When a mortgage and all other debts against the property are paid in full, the homeowner has 100% equity in the property.
Q. How do I determine the equity in my home?
A. Simply take the estimated value of your home and multiply it by 80%, then deduct any existing mortgages you may have. The figure remaining is the maximum amount you may borrow. Here's an example:
|Estimated Value of Home||$100,000|
|Loan to Value (LTV)||x 80%|
|Current First Mortgage Balance||-$55,000|
|Maximum Amount to Borrow||$25,000|
*AmeriCU finances up to 100% LTV on a Fixed Home Equity Installment Loan and up to 80% LTV for a Variable Home Equity Line of Credit*
Equity exists in conjunction with the Loan-to-Value (LTV). You can determine the LTV by dividing the loan amount by the property’s value or selling/purchase price, whichever is lower. For example, you buy a $100,000 home with a $20,000 down payment of your own money, and cover the remaining $80,000 with a mortgage - 80,000 divided by 100,000 gives you a Loan-to-Value ratio of 80% and equity of 20%.Equity and LTV are both important because we prefer that a borrower have as much equity as possible. Traditionally the higher the LTV on a loan, the higher the risk of default; alternatively, the higher the equity, the lower the risk - and therefore the lower the interest rate, cost, and fees associated with funding the loan.
Q. What’s the best Home Equity Loan for me?
A. That depends on your answers to the following questions: Do you want the cash in one lump sum (loan), or in a series of ongoing draws (line)?
- Do you want the payments to remain the same each month (loan) OR would you mind if the payments changed month to month as long as you only have to make payments on the amount of money you use (line)?
- When do you need the funds?
- For how long do you need to finance your purchase or improvement? Is it for a short-term purpose, or a long-term?
- How much time will you need to pay it off?
- How large of a monthly payment can you handle?
Q. Do I need to occupy the residence that I'm using as collateral?
A. Yes, our home equity loans are for owner-occupied residences only. (No leasing is allowed during the life of the loan.)
Q. Is there a minimum/maximum that a I can borrow?
A. Yes, the minimum loan amount is $7,500 and the maximum loan amount is $500,000 for both loans and lines. If your financing needs fall below $7,500 we can offer you a Home Improvement loan. If you need more than $500,000, we offer many mortgage programs with competitive rates and terms.
Q. How is the value of my home determined by AmeriCU?
A. We hire an appraisal service to do a "drive-by" appraisal on your home. A drive-by is done to "estimate" the value of the home, most often given in a dollar "range" (e.g., "Based on exterior inspection from the street the subject property has an estimated market value between $72,000 and $77,000."). The appraiser will review the home’s exterior (siding, roof etc…), and the surrounding neighborhood. They will send the analysis to the your financial center representative within four (4) business days. Keep in mind, improvements inside the home do not affect its estimated value.
Q. What does a drive-by appraisal cost me?
A. Nothing ($0) at the closing; however, if you choose to pay off the loan within 36 months from your open date, you would then be responsible to reimburse the Credit Union in full for any third-party expense incurred to process your loan. A Good Faith estimate is provided to you when you apply for a Home Equity at AmeriCU.
Q. How much does it cost to apply for a Home Equity Loan?
A. That depends. It is:
- Nothing ($0) if the first mortgage on the proposed property is currently held by any financial institution. However, please note that the New York State Mortgage tax payment is your responsibility and will need to be paid by you at the time of the loan closing meeting; OR
- $399 if there are no open mortgage liens on the proposed property or if the mortgage is privately held.
Q. How long does it take to obtain initial approval?
A. Once the home equity loan is referred to an AmeriCU loan officer, the process should be seamless. Our goal is to approve the home equity loan at the time of application, during the same day. This approval would be subject to a satisfactory drive-by appraisal, stub and flood search.
Q. How long does it take to process/close this loan?
A. If you have a mortgage with any bank or credit union, you can receive your funds in as little as two (2) weeks. If you don’t have an open mortgage or the mortgage is privately held, the process may take up to four (4) weeks as loans are processed by our attorney.
Q. When will I receive the loaned funds?
A. It is important to explain to you that, due to NYS law, the funds will not be available at your closing meeting. You will receive access to your funds after the mortgage has been recorded with the county and the three-business day Right To Rescind period has passed.
Q. What is the definition of three (3) business days for the Right to Rescind period?
A. A New York State law is in effect to protect your rights, this law provides for a "cooling off period". You have until midnight of the third business day after the loan closing to cancel the loan. The first day after all three of the following events occur - counts as Day One:
- You sign the loan application.
- You receive the Truth-in-Lending disclosure ("Closed-End Note, Disclosure, Loan and Security Agreements") that explains the key terms of the loan: the annual percentage rate; the finance charge; the amount financed; the total of payments; and the payment schedule etc…
- You receive two copies of the "Notice of Right to Cancel (Rescind)" form. Business days include Saturdays, but not Sundays or legal public holidays. For example, if the last of the above three events occurs on a Friday, you have until midnight on the following Tuesday to rescind.
During this waiting period, AmeriCU can not take any action on the loan. For example, no loan proceeds are disbursed and no contract delivery of materials or work should be started. To cancel anytime during these three days, please notify AmeriCU in writing that you wish to cancel the loan. A cancellation via telephone is not acceptable. A law does allow one to waive their right of rescission if there is a "bona fide personal financial emergency" such as medical emergencies, damaged roof, house foundation, etc.
Q. What insurance options are available?
A. Joint life insurance is available, and disability for the prime member is available for both types of loans.
Q. What if I do not have an open mortgage on my home?
A. First, the good news is that you have 100% equity in your home. This makes you eligible for either a Home Equity product or one of our Mortgage products. Which product you choose depends on how much you'd like to borrow and what your needs are. The closing process can take up to four (4) weeks, as our attorney will handle this loan.
Q. What forms or information do I need to apply?
A. To process your application, you'll need to provide:
A recent pay-stub (if applicable)
- Copies of paid property tax receipts
- A copy of your property deed (if applicable)
- The Original Abstract of Title. However, this is needed only if there is no first mortgage or if the mortgage is privately held.
Q. Is the Interest I pay on the Home Equity tax deductible?
A. The interest portion of your home equity loan may be tax deductible, similar to the deduction on a first mortgage. Depending on your Loan to Value, the interest may be deductible up to $100,000. Check with your tax advisor for details or review the IRS Publication #936 "Home Mortgage Interest Deduction". The tax savings can be substantial when compared to your non-deductible monthly debts.
Q. When would I be required to reimburse the credit union for third party expenses (Prepayment Penalty)?
A. If you pay off the Home Equity Loan or close your Home Equity Line of Credit within three years (36 months) of the date of closing (also known as the loan's open date), you will be responsible for full reimbursement of the closing costs or third party expenses paid on your behalf by the Credit Union.
Q. Is flood insurance required?
A. Flood insurance is required on all home equity loans if the home is located in a flood hazard area. AmeriCU will determine if the home is in a flood zone by completing a flood search during the initial application process.
Q. Will I receive checks with my Line of Credit?
A. Yes, 25 free checks are provided. (The minimum advance amount is $250 per check.)
Q. Are there any reasons why a home equity loan may not be a good option?
A. Yes, in certain circumstances:
- The value of your home can fall over time, which could either lower the equity available to borrow against or reduce the value you repay against.
- No home leasing is permitted during the term of the loan.
- If you default on the loan, you could lose your home, one of your most valuable assets.
- Unlike fixed-rate home equity payments, monthly payments on variable-rate equity loans can go up substantially during high inflation -- but your income may stay the same. (To protect you, the interest rate is capped at a maximum of 15%.)
- Such loans can be a risky spending tool for younger homeowners who are not established in their careers and have less experience owning a home and managing money. This could also be risky for older borrowers who would be tapping into their nest egg close to retirement.
Q. Can I refinance a Home Equity held at another financial institution or an existing AmeriCU Home Equity?
A. Some members choose to convert their Home Equity Line of Credit to a Home Equity Installment Loan when the 10-year draw period ends. Others choose to refinance to obtain a shorter-term loan to build new equity more quickly. A lower interest rate and monthly payment on a home equity loan can free up cash for other uses, or make your debts more manageable. Interest rates move in cycles, so the best time to refinance is when rates drop. Typically, rates should decrease by a point or more before you choose to refinance.
Q. Do we offer home equity financing to members who do NOT reside in our local area?
A. Yes, we can offer a Home Equity Installment or HELOC loan to virtually anyone. Membership restrictions, however, do apply.
* Certain fees may apply, including appraisal fees, and flood and stub search fees. These are disclosed to you on the Good Faith Estimate and Application Fee Disclosure provided at the time of application.
* We will identify an appropriate appraisal firm in your local area.