EquityLineBlog

Zillow made waves when they made it easy to get a rough idea of your home value with Zestimate. You can even get a home estimate via cell phone text. It doesn’t replace a professional home appraisal, but it can give you a ball-park starting point to get an idea of what size of loan you might need or qualify for.

A few days ago, they made even bigger waves in the mortgage industry with the announcement of Zillow Mortgage Marketplace. Here’s how it works:

1. Create a Loan Request
   You are anonymous to lenders — no name, phone, or SSN required
2. Receive Quotes
   Get personalized quotes from confirmed lenders
3. Contact the Lender
   Review quotes, profiles, and ratings. Then you contact them, they don’t call you.

It’s free for both borrowers and lenders, and it could be a terrific way to shop for your home equity line. Yep! HELOCs are supported in the mortgage request form.

What’s especially interesting about the Mortgage Marketplace is that they are attracting lenders with free unlimited home loan leads — and it’s working. As of this posting, there have been 6345 loan quotes in response to 5711 loan requests. Not bad for a four-day-old service!

I filled out a loan request form to test it out. The process was painless. I’ll let you know how it works out!

A Home Equity Line of Credit (HELOC) is a form of revolving credit (like your credit cards), secured by your home. It is the most flexible type of home equity loan. Because of the substantial collateral, HELOCs can give you a substantial credit line to tap into for a variety of purposes.

How much credit? That depends on how much equity is available. For example, say you have a home worth $250,000. Lenders generally won’t loan the full value of your home, so they’ll look at part of the value — say, 80%, or $200,000, in this case. Then they subtract the balance you owe on any existing mortgages. If you owe $150,000 on your home, the lender might offer you a credit line of $50,000. Lenders will also consider factors like your debt load and credit history to decide how much credit to offer you.

What are the rates? Home equity lines generally offer much better interest rates than most credit cards, and it’s possible to find equity lines that are attached to a Visa or MasterCard, very similar to the way a Visa check card works with a checking account. Interest rates in the mid single-digits are common, compared to common double-digit interest rates for many credit cards. Interest rates for HELOC’s are mostly variable, and usually tied to an index like the Prime rate. Interest rates at or near prime are common.

What are the drawbacks? The most obvious drawback is that the line is secured by your home, so if you fail to pay it, you could lose your home. It’s no different in that sense from a mortgage loan, of course, but if you have trouble controlling your spending habits with credit cards, it’s probably a good idea to avoid making it as easy as a card swipe to spend against your home equity!

What are the features to look for? Shop for a low interest rate, of course. I advise shopping for a HELOC that gives you the same convenience as a modern checking account, complete with online account access, a major credit card, and no silly limits like minimum draw amounts (for example, forcing you to spend at least $300 on a draw), and no limits on how quickly you repay the credit. Another important factor to consider is the cost of establishing the HELOC. It is a loan against your home that will generally be considered a second mortgage, and as such, it will likely have closing costs similar to any other home mortgage plan. Look for a HELOC with low set up fees and closing costs. If you can afford to pay your closing costs in cash, it will save you a lot of interest money in the long run.

What are home equity lines good for? The most obvious uses for HELOCs are major expenses, such as a home remodel, school, large medical expenses, etc… However, the best use of a HELOC is to save money. Used properly, a HELOC can be used to pay off high-interest debts like credit cards and car loans. You can even use your HELOC to pay down your mortgage faster and free up more equity in your home.

I recently decided to make large payments to my HELOC and then swipe the equity line credit card for purchases in order to reduce the average daily balance on the HELOC for interest calculations (in other words, save money). Before I made that change, I got advice from my dad (a mortgage broker) about whether or not it was a good idea.

He told me at the time, not only is it a good idea, it’s a common practice in Australia, and has recently caught on in America. Recently, banks have become much more conservative about equity loans, and they’re under increasing pressure to be more conservative about the credit they’re providing to customers. With that in mind, there has been a recent freeze in home equity lines. My dad called me to warn me about it so that I wouldn’t have money frozen in my equity line that I would need to pay my other bills.

I decided to investigate. As far as I can tell, equity lines are being frozen when property values dip lower than they were when the equity line was first approved. Since my property has appreciated since my HELOC, and the value is holding well, this probably won’t effect me, but it’s a good idea to be aware of this practice — especially if you’re using your HELOC to make regular purchases, like I am. I found a Youtube video on the subject: