Using the Equity in Your Home

Ready to test your knowledge? You'll have ten multiple choice questions to answer. Click on each question to reveal the question and multiple choice answers. After you've completed answering all ten questions, click "Grade Me!" at the end of the quiz to see how you did.

Question 1

The popularity of home equity loans is due to the fact that:

(A) They are tax deductible.	Correct Incorrect
(B) They are secured by a residence.	Correct Incorrect
(C) The rates are lower than an auto or credit card rate.	Correct Incorrect
(D) All of the above	Correct Incorrect

Because home equity lenders take a secured interest in your home, they can offer lower rates than if the loan was unsecured, as are most credit card offerings. You can also generally deduct home equity loan interest if the loan amount is $100,000 or less ($50,000 or less if married filing separately).

Question 2

Which of the following DOES NOT impact the amount of equity you have in your home:

(A) Making your monthly payment to pay off your loan.	Correct Incorrect
(B) An increase in the appraised value of your home.	Correct Incorrect
(C) The size of the down payment you made when you purchased your home.	Correct Incorrect
(D) Your annual property taxes.	Correct Incorrect

The amount of equity you have in your home is determined by the current, appraised value of your home less your current outstanding mortgage (or home equity) loan balances. An increase in your home value will increase the amount of equity you have in your home. Also, any reductions to your outstanding loan balance, either by making payments on the loan, or due to the size of the down payment you made when you purchase the home, will also increase your home equity.

Question 3

When applying for a home equity loan or line of credit, lenders will consider your:

(A) Income	Correct Incorrect
(B) Credit history and credit score	Correct Incorrect
(C) Loan-to-Value (LTV) Ratio	Correct Incorrect
(D) All of the above	Correct Incorrect

Home equity loans and lines of credit aren´t much different from other loans. Potential borrowers are evaluated on their ability to repay the loan based on their current income, credit score and credit history. Additionally, borrowers have to have sufficient equity in their home to form a basis for the loan. That is evaluated based on the loan-to-value ratio of the home. That ratio is based on the appraised value of the home and outstanding loan balances.

Question 4

Which of the following IS NOT a characteristic of a Home Equity Line of Credit (HELOC)?

(A) The ability to borrow money in a number of different installments.	Correct Incorrect
(B) During the initial period, you will make only interest payment on the outstanding loan balance.	Correct Incorrect
(C) It can be accessed by check, credit card or electronic transfer ordered by phone.	Correct Incorrect
(D) The interest rate is fixed, and so are the monthly payments.	Correct Incorrect

Not all Home Equity Lines of Credit, or HELOCs are the same, of course. But for the most part, the monthly payments you make during the initial draw period will vary based on the outstanding balance on the HELOC. As you borrow more money, your monthly payment will increase as the loan balance increases. Interest rates will typically fluctuate during the draw period as well. During the repayment period of the loan, your payment will be fixed, along with the interest rate.

Question 5

Which of the following IS NOT a characteristic of a home equity loan?

(A) A fixed interest rate and monthly payment.	Correct Incorrect
(B) As you pay off the principal, you can use the credit again, like a credit card.	Correct Incorrect
(C) You receive the borrowed funds in a single installment once the loan is approved.	Correct Incorrect
(D) You immediately begin repaying both principal and interest.	Correct Incorrect

Only Home Equity Lines of Credit, or HELOCs, allow you to dip back into the line of credit and borrow again if you are below your loan limit. Home Equity Loans typically require that you borrow a fixed sum at a single point in time and then repay that loan with a fixed payment and rate.

Question 6

Which of the following ARE NOT potential pitfalls of a home equity loan or line of credit?

(A) If you use loan funds to purchase goods, you might be paying off the loan long past the useful life of the purchase.	Correct Incorrect
(B) If the value of your property decreases, you might wind up owing more than the property is worth.	Correct Incorrect
(C) If you can't pay off your home equity loan, you could lose your home.	Correct Incorrect
(D) The interest paid on the home equity loan is, in most cases, tax deductible.	Correct Incorrect

In most cases, interest paid on a home equity loan or line of credit is tax deductible so long as the total loan amount is less than $100,000 or the amount of equity you have in your home.

Question 7

Which of the following ARE NOT advantages of using the equity in your home to consolidate credit card debt?

(A) You will probably pay a lower interest rate on your home equity loan than you are paying on your credit cards.	Correct Incorrect
(B) The interest paid on the home equity loan is tax deductible, while credit card interest is not.	Correct Incorrect
(C) If you fail to repay your credit cards, the credit card company can force the sale of your home to get their money.	Correct Incorrect
(D) All of the above.	Correct Incorrect

When you obtain a home equity loan, the lender becomes a lienholder on your home. Should you fail to repay the loan, the lienholder has the legal right to foreclose on the home and sell the property in order to recover the outstanding loan balance.

Question 8

If you want the most benefit from using the equity in your home to make a major purchase:

(A) You should pay off the loan on a term equal to or shorter than the term of your alternative financing choice.	Correct Incorrect
(B) You should make sure the item purchased adds or retains its value throughout the payback period.	Correct Incorrect
(C) That you factor in the upfront costs for the loan in addition to the interest rate and interest tax deduction.	Correct Incorrect
(D) All of the above.	Correct Incorrect

Taking out a loan and paying it back over a longer term than the purchased item´s useful life makes little sense. Using home equity loan proceeds to pay for a college education will yield benefits for the remainder of the student´s life. Using home equity loan proceeds to pay for a week long vacation is not a strong financial move. Borrowers should also consider alternative financing choices and make sure they´re selecting the most cost effective loan, both in terms of the length of the term and the interest rate as well as initial closing costs and interest deductibility.

Question 9

If you obtain a variable rate home equity line of credit (HELOC):

(A) You risk your monthly payment and interest costs increasing dramatically if interest rates increase during the initial and repayment term of your loan.	Correct Incorrect
(B) You will likely receive a lower initial interest rate than you will receive with a fixed rate loan.	Correct Incorrect
(C) You need to understand the maximum rate the HELOC can reach and understand the impact on your personal finances should that occur.	Correct Incorrect
(D) All of the above.	Correct Incorrect

Variable rate loans typically offer an initial lower rate than comparable fixed rate loans of the same term, but borrowers are subject to fluctuations in market conditions that can drive rates higher or lower. If interest rates increase dramatically, your payment can become unaffordable. That´s why you should understand how high your interest rate could go if adjustments occur.

Question 10

Which of the following WILL NOT be a concern if you have an outstanding home equity loan or line of credit and you want to refinance your mortgage:

(A) If you want to keep your equity loan or HELOC, you must obtain the home equity lender's approval.	Correct Incorrect
(B) Your mortgage lender will consider both the outstanding balance on your home equity loan and your mortgage loan amount when calculating your loan to value.	Correct Incorrect
(C) If the value of your home has decreased since you took out the home equity loan or line of credit, you may not be able to refinance your mortgage if your home's value does not cover the loan amounts.	Correct Incorrect
(D) Your home equity lender will become the primary lien holder on your home.	Correct Incorrect

Home equity loan or HELOC lenders typically take a subordinated lienholder position behind the primary mortgage lender. When you refinance, your new mortgage lender will make a formal request to the home equity lender to stay in that subordinated position and allow the new mortgage lender to assume primary position. While the home equity lender has the right to refuse such a request, such a refusal will likely result in your primary mortgage not getting approved.

	Correct	Incorrect
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Using the Equity in Your Home

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