This past week, I was invited to review "Equity Funding", a loan/refinancing product being sold by a broker and funded by GMAC.
Equity funding means using a home equity line of credit (HELOC) to finance your home instead of a traditional mortgage. The theory is you will pay off your home faster because you deposit your paycheck into your equity account, and then use the equity account to pay your bills, instead of a regular checking account. By having a lower monthly balance, you will pay off your house sooner. The other plus is that you have credit available in case of emergency, based on the balance.
It is my opinion that the program can be very good for someone who has very strong financial discipline. Lousy idea for someone who would be tempted to use the line of credit to support a lifestyle they cannot afford.
I was brought in with a group of people, rather then one on one.
During the presentation, I had questions. I would like to teach you some of the questions I asked. You should ask these questions, and more, before you sign up for this, or any, type of financing.
Make sure you have all answers in writing.
Here are the questons:
1. The LTV was 90%
The Loan to Value ratio is high. (The bank will loan you 90% of the homes value)
It should be 70-80%. Banks do not like to assume risk of more than 80% of the homes value. Anything more, the bank generally requires an expensive insurance policy paid monthly by the consumer.(known as P.M.I. or M.I.P.)
Question: Who is paying for the 10% risk policy and how much are the monthly payments?
2. What are the closing costs and other associated fees?
3. If the value of the home goes up and you want to increase your credit limit based on the new value of the home, what are the fees, and what conditions have to be met? (appraisel, creditworthiness, etc.)
4. If I make a late payment, do my rates or fees increase? If yes, by how much do they increase?
Are the terms of my deal forever locked, or can they change?
5. Are the interest payments tax deductible?
6. Is the interest rate locked or fixed? In the case of the one I checked out, the rate was variable.
(adjustable) . When I challenged the variabe rate, I was told "Hopefully one day the light would come on, and I would understand that variable rates are better than fixed rates."
So I asked the cap (maximum the interest rate can climb to) on the rate. They said 5%. That means right now the interest rate is 6% and with a 5% cap the highest the rate can go is 11%. Fine, if you feel like you can afford the payments at 11%, go for it. Yes, rates go down, but they also can go up to the max. They may not, but they can.
In summary, equity financing can be a vey good deal for the right person. Just be sure to ask all the right questions. Always remember, you can pay an attorney a couple of hundred dollars to explain the terms to you. Could save you money in the long run. And, never, never be in a hurry to sign. If you feel like you are being rushed, stop and ask yourself, am I missing something here?
Got questions? Post a comment. I will answer your question in an open format.
Dan
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