© 2012 Cengage Learning

Residential Mortgage Lending: Principles and Practices, 6e Chapter 10 Home Equity Lending

© 2012 Cengage Learning Objectives After completing this chapter, you should be able to: – Discuss the importance of this type of loan to the homeowner and to mortgage lenders. – Understand the differences in documentation, processing, underwriting and closing between this type of loan and first mortgage loans. – Be able to explain the difference in compliance for this type of loan and other mortgage loans. – Explain why the home equity line of credit (HELOC) is a variable-rate. – Provide examples of how the interest rate of a HELOC is calculated at and how it can change. – Discuss the various methods for accessing a HELOC and which is the most rapidly growing way. – Examine the most productive ways to market equity loans.

© 2012 Cengage Learning Types of Home Equity Loans Second mortgage Home equity line of credit Home improvement loan “Piggyback” mortgage

© 2012 Cengage Learning Home Equity Line of Credit A.Loan Amount B.Introductory rate C.Loan to value D.Payment method E.Adjustment periods F.Methods of access G.Title insurance or title search H.Annual fee I.Appraisal

© 2012 Cengage Learning Periodic Statements Balance outstanding at the beginning of the billing cycle. Identification of each credit transaction, including amount, date, etc.. Any credit to account during billing cycle including the amount and date. The periodic rate used to compute the finance charge, along with the range of balances to which it applies and the corresponding APR. Balance to which a periodic rate was applied and any explanation as to how that balance was determined. Amount of any finance charge added to an account during the billing cycle, using the term “finance charge” and itemizing the components of the finance charge. APR equivalent to total finance charge imposed during the billing cycle. Amounts, itemized and identified by type, of any charge other than finance charges debited to the account. Closing date of the billing cycle and the outstanding balance on that date. Date the new balance may be paid to avoid additional finance charges. Address for notification of billing errors.

© 2012 Cengage Learning RAM A reverse mortgage is designed to enable older retired homeowners who are likely to be on fixed incomes to use the equity in their homes as a source of supplemental income while still retaining ownership.

© 2012 Cengage Learning What Do You Think? Why are equity loans so popular with consumers? Identify and discuss the keys for success from a mortgage lender’s perceptive. What are the important differences between a closed-end equity loan and a home equity line of credit (HELOC)?

© 2012 Cengage Learning What Do You Think? What is the most popular method of repaying a HELOC? Why is this payment method so popular? What is the “Periodic Statement” that is used with HELOC? What information is contained in this statement?

© 2012 Cengage Learning What Do You Think? What factors determine the loan amount for reverse mortgages? What are important differences in types of reverse mortgage programs?

© 2012 Cengage Learning Check Your Understanding 1.Approximately 30 percent of homeowners have an equity loan. 2.Home equity loans often are referred to as second mortgages because they are commonly in a secondary lien (or junior lien) position. 3.The average FICO score for an equity borrower is below Most lenders used internal staff to close equity loans. 5.Most equity lenders use the same processing and underwriting standards as for first mortgage loans.

© 2012 Cengage Learning Check Your Understanding 6. Most closed-end equity loans have a variable-rate. 7.Both the closed-end equity loan and the home equity line of credit have a draw period and a repayment period. 8.The interest rate on a HELOC is established by using an index and a margin. 9.The most common repayment method for HELOCs today is similar to a self-amortizing first mortgage. 10.A periodic statement is a Federal Reserve requirement for both equity loans.