Q & A: Home Equity Loans, Reverse Mortgages

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Q: What is the difference between a home equity loan and a home equity line of credit? Are there pros and cons?

A: Good question. A home equity loan is a fixed rate mortgage, exactly the same as a normal mortgage except it can go behind a first mortgage. The terms are usually a little different; rarely can you get a 30 year fixed and the rates are usually a little higher than normal mortgages. Also, you get the lump sum of money upfront. The good part is that it is a fixed rate and will not change.

A home equity line of credit is a revolving loan which means you can take money out as you please and only pay off what you have outstanding. It is an interest-only payment for a certain period of time (usually 10 years) and the rate is tied to the prime rate (a certain amount above or below), which is 3.25 percent right now. It's a great way to get cheap money as long as you understand you have to pay more than what you are billed in order to pay it off. 

After 10 years, it usually flips into a 20-year fixed loan. The real downside is that it is a variable rate which adjusts as the prime rate adjusts. Right now it's very low and will likely stay that way for another year at least. However, if the economy continues to move in the right direction, it will most likely go up, and continue to go up for a while.  

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Q: I am purchasing a home and they have some done some renovations without proper permits and variances. If that is the case will I be able to secure a loan for this property?

A: It is important that the home you are buying is legal or else you may get into some trouble with it later on.  A lender expects the home to be in legal order but there are many occasions where a lender may have no idea something isn't done legally, unless it shows on the title report that a permit was taken out and never closed-out/signed off. It's important to work with your attorney to make sure the home has proper permits.  If you try to do work, legally, later on, and the inspection shows that there are illegal things done with the house, you likely will need to make everything legal.

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Q: My grandparents have lived in the same property for many years. They are elderly and would like to have a bit of extra money. How do I know if a reverse mortgage is right for them? Are there banks still giving reverse mortgages?

A: Banks are still giving reverse mortgages and they could be a great thing for seniors as long as both they, and their families, are aware of what's entailed. The best thing about a reverse mortgage is that the owners can stay in the home, remain on the title and not make mortgage payments while potentially enjoying the availability of a line of credit, or monthly payments.

The one thing that everyone does need to be aware of is the idea that the loan is a negative amortization loan, meaning interest is added on to the outstanding balance on a monthly basis. Therefore, you should not expect to have much equity in the house when the time comes to sell.  As long as those involved don't have that expectation, it can be a great thing for seniors.

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Q: My house is in contract and I was getting a feeling the buyers didn't want the home anymore. They kept coming to measure, and making comments that the renovations they wanted to do were difficult. Their rate lock is expiring soon and we still have no closing date on our house. If their lock expires before we close can they walk away and get their deposit back?

A: There is probably a mortgage contingency clause in the contract that lays out the terms under which the purchaser would be able to get their money back, and walk away.  A rate lock is not generally a part of a mortgage contingency so that may not have bearing on whether they can get their money back or not.  This is something to consult with your attorney on to see what the purchasers have done with regard to obtaining a mortgage so far.

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Dottie Herman is CEO of Douglas Elliman. If you have a real estate question for Dottie, please send it to; Reporters@WPCnews.com