1. Buying a home with a home equity line of credit might be tricky nowadays but if you can do it I would suggest to look into it. It is probably not the first home loan that you are going to look at buying a piece of property with, but it is very advantageous in many financial kind of ways.
2. Most people start the mortgage shopping process by comparing different mortgage companies interest rates on the 30 year fixed rate mortgage. This is a safe bet and 9 out 10 times should be the way that most people go about picking the right mortgage for them. Its a way that people will know exactly what their payment will be until the day they pay it off. No surprises with that one. It usually comes down to picking the right bank or getting referred to somebody that your friends went with.
3. What makes the home equity loan so appealing is first off, the closing costs are very low. The average closing costs on a 30 year fixed mortgage not including state tax fees or lawyer fees is in the $2k-$3k range. This usually covers the appraisal, title insurance, and any underwriting costs. This will usually be the same across the board regardless of what mortgage company you go with. These are all third party fees and its hard to get around those.
4. The normal closing costs on a home equity line of credit are usually less than $1k. There is something about the wording that is involved in the paperwork when doing a home equity loan that considers it more of a lien on the property than an actual mortgage. I will say though that it differs from state to state but I saw times when I was a mortgage banker that we had a system called an “automatic value module” that searched a database of recent home prices in the area you were looking to buy or refinance. If the value of the home came back at what we needed to make the loan work, we would not even have to do an appraisal on the home. This would save the cost of an appraisal (about $350) plus the week it took for the appraisal to go out and get it back. This did not happen all of the time, but since it was considered a second lien on the property it was considered a little bit riskier. Whatever mortgage company held the mortgage note on that property would get paid second in the case of a foreclosure on the property. There was less title work that had to be done since the property was already under the property owners name.
5. With closing costs being about $1k-$2k less than a normal fixed rate mortgage you are already starting to save money. The only trick to this scenario is trying to find a mortgage company that will do a first lien home equity loan. ( Find some at:) Most mortgage companies stopped doing second mortgages all together because they are losing their butts of trying to sell these loans on the secondary market. This is because of falling real estate values across the country and with people owing more than what their house is worth.
6. Let’s say that you can find a mortgage company that will do a home equity loan as a first lien for you. You are going to save money on the closing costs already. The only downside that I can think of is that a HELOC is considered a adjustable rate mortgage. The interest rate is never fixed on the loan. While this might make some people nervous a bout the whole concept of not knowing what your mortgage payment will be from month to month it is no need to get anxious.
7. As of September 2008, interest rates on Home Equity Loans are around 5.25%. Interest rates on 30 year fixed rate mortgages are around 6.25% with no points. Its easy to see that you are already saving about 1% on the rate alone.
8. What is a neat feature of the home equity loan is that it gives you a lot of flexibility with your monthly payments. Your HELOC’s payment would be based off of a interest only payment. Let’s say you took a 30 year mortgage of $100k at 6.25%. Your payment would be $615.72. A HELOC at 6.25% on $100k would be $520. The difference between the two is about $95. This means that only $95 of your fixed payment would be going to the mortgage every month for probably the first 3 years of the loan. You might as well just consider it a interest only loan in the first place. This extra $95 could come in handy for extra bills, rising fuel prices, or to start a savings account. If you do not need the extra money then put it back towards the loan and pay it down.
9. What also is cool about a HELOC is that if you do put extra money towards the loan your payment the very next month will go down accordingly. Many people think that if they make a one time larger payment towards their 30 year mortgage that their payment will go down. This is not true. Your payment stays the same until the day its paid off with a 30 year fixed loan. On a HELOC your payment will go lower even if you put $1 more towards your interest only payment. This is great because you can see you hard work and determination going to paying off your mortgage. By doing this you also leave your self an option to borrow back against the loan in the future. On a 30 year fixed you can never re-borrow witout having to go through the whole refinance process again. You will have to pay closing costs all over again. The HELOC will let you borrow up to whatever space you have available with a quick call to your bank saving you thousands of dollars in closing costs all over again.
10. The benefits of buying a home with a Home Equity Loan are lower closing costs. Lower interest rates. Greater flexibility with your monthly payments. The option to pay more towards the loan and see you monthly payment slowly go down. If you pay down some of the balance you can always borrow it back saving your self a lot of money in future closing costs. It might be hard finding this first lien home equity line of credit. Many mortgage companies stopped doing second mortgage type loans because they are hard to sell on the secondary mortgage market. If you can find one you will probably have to put down at least a 10% down payment and have credit scores over 720. You will not have to pay any PMI (private mortgage insurance) which will also save you more money on your mortgage payment if you cannot come up with a 20% down payment.