25 Apr Shopping for Your Line of Credit – Part 1
You’ve got your budget and CashMap’s cash management strategy looks easy to implement. To help you keep track of the process, I created a simple list of action items called Your Next Step Checklist. This is a part of my consulting practice. I hope you find it helpful. As always, I welcome your feedback.
You’re ready to contact your favorite financial institutions and see what they have to offer. Do not expect the loan representative to understand what you are doing. I’ve visited and called numerous financial institutions and I’ve yet to meet one person that understands how to use a line of credit to build wealth. It’s up to you to ask the appropriate questions.
So, in this post and the following posts, we’re going to walk through key questions to ask and features commonly offered with a line of credit. To simplify the process, I created a comparison worksheet that you can use to compare the features offered. Click on the following link:Your Line of Credit Shopping Comparison.
If you own your home, you want to ask about their home equity line of credit. If you have enough equity (Equity is the difference between your home’s value and your mortgage balance.) in your home, financial institutions offer a second mortgage or a line of credit. What’s ‘enough’ equity? In the U.S., including your line of credit, you must have at least 20 percent equity in your home. If your home is worth $250,000, your mortgage balance plus your line of credit can be no greater than $200,000.
In Canada, last year the Office of The Superintendent of Financial Institutions implemented new regulations for home equity lines of credit. Click on the link and read summary Canada Mortgage News. It’s important to note, Credit Unions aren’t impacted by this regulation.
In the example we’ve been using, you deposit $5,025 in the bank each month, your monthly expenses total $4,025 (This includes your mortgage payment of $1,364.40), your mortgage balance is $233,000 and over the past sixteen months you have saved $24,000. To use the CashMap strategy you only need a $6,500 line of credit. Frequently, $10,000 is the smallest line of credit a bank will provide. This means that the value of your home must be at least $303,750. Here’s how I figured this out: (233,000+10000)/.8.
If your home’s value is at lease $303,750, you’ll be offered either a line of credit or a second mortgage. You want the line of credit. A second mortgage looks like any regular loan – you’ll have fixed monthly payments and you won’t be able to withdraw dollars during the term of the loan. Flexibility is one of the key features that make a line of credit attractive.
In my next post, we’ll cover what to do if you don’t own a home or don’t have enough equity in your home.
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