Need help understanding home equity credit line
Question: I want to take out a home equity line of credit. I applied at ditech.com and had a terrible experience with the worst customer service I’ve ever encountered, so I canceled the application. I need help understanding how the interest works. Nothing ditech told me made sense. Their version is that the line of credit would be $15,000. As soon as I use any of it I would start paying an amount of interest per month that is 10 percent of $15,000 regardless of how much of the line of credit I used. I could use $50 but still have to start paying all that interest. And, I would have to keep paying it for ten years, even if I paid off the amount of the line of credit I used. Does that sound right? I’d end up paying interest on money I never used. I can’t imagine anyone agreeing to that kind of a deal. Can anyone explain this? Or, recommend printed or on-line resources I can use to educate myself?
Answer: I’ll make it simple for you: Home equity means just that . . . it means you are allowing a bank to own part of your house. In return, they give you cash at a (relatively) low interest rate. All you have to know is that it’s a really really BAD idea, and don’t do it. That was easy, eh?Generally, this is a bad idea unless it’s to get out from under much higher interest rate loans. It’s called “digging yourself in deeper”. Let’s see: you’re considering paying 10% *PER MONTH*? And on the full amount of the credit line? Those underworld guys who break kneecaps for a living called “loan sharks” have MUCH better interest rates, and NO, I’m not recommending them either. You borrow $50 and have to pay $1,500 a month in interest? These guys put the Mafia to shame. Are the terms “first-born child” or “immortal soul” mentioned in the loan contract, by any chance? A bank home equity line of credit lets you borrow money that you need, often by writing a check against your line of credit. You pay interest on the amount you borrow, although possibly they might insist you take it in whole hundreds of dollars, and there might be a minimum loan (NOT likely to be the whole credit line, though). The interest rates for a home equity line of credit should be less than non-promotional interest rates on credit cards.
There is also the home equity loan, in which you borrow the FULL AMOUNT, and you pay interest on all of it. If you leave it in the account they set up for you rather than spending or investing it, that’s stupidity on your part. You might possibly borrow an amount you set, then spend it over a period of several months on home improvements or something. It’s not a line of credit, so don’t use it like one.
Banks, however, may staple-gun bar codes to your head or think of endless ways to say NO to using your miles credit (For documentation, see Washington Mutual or Capital One TV ads).
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