What You Should Know About Home Equity Loans

Posted on February 9, 2011 by admin

What You Should Know About Home Equity LoansFailing to educated yourself in any financial decision can, ultimately, lead to disaster. You can easily prevent this from happening by educating yourself about the process and details. These principles apply to obtaining a home equity loan as well.

Understanding equity

Equity refers to the amount of your home that you actually own. This is determined by subtracting the amount you owe from the value of your home. While a home equity loan may give you the cash you need, it reduces the amount of ownership you have in your home.

Understanding Lenders

You can obtain a home equity loan from almost any financial institution. However, some options may end up costing you more money. Understanding the differences between lenders can help you to find the best home equity loan terms.

Banks and credit unions both offer home equity loans. While these financial institutions may seem to operate the same on the outside, there are a few differences. These differences can often mean savings for you.

Credit unions, unlike banks, are not driven by financial gain. In fact, credit unions are nonprofit institutions. Banks, however, have investors to pay and cater to. This can make all the difference in saving when obtaining a home equity loan. The drawback is that, in order to obtain a home equity loan with a credit union, you must first become a member. To become a member, you must meet a certain criteria. Generally, you must belong to a specific church, live in a specific community, or have children in a specific school district.

You can also use a mortgage broker to obtain your home equity loan. Unlike banks and credit unions, brokers do not actually issue the loan. Instead, they help you find a loan. Most brokers work with specific set of lenders.

While it may seem like a broker is your best option for saving money, this isn’t entirely true. First, brokers are not obligated to help you find the best rate. In fact, many brokers often make a commission based on the loan terms that they provide to you. The only way to get around this loop hole is by contracting with a specific broker.

Brokers also have fees that you are responsible for paying. These fees can include points as well as a portion of the origination fees. Points will affect the interest rate of your loan. When working with a mortgage broker, request that they translate their points into a dollar amount for you. This will help you to understand the impact it will have on your loan. You may also be able to negotiate these fees.

Best Rate?

While the best interest rate may sound like the least expensive loan, this is not always true. There are multiple details that go into determining how much you pay over the life of the loan. Points, administrative fees, closing costs, prepayment penalties, and check writing fees are only a few of these factors. When discussing the loan specifics with your lender or broker, it is essential that you get all of the fees in writing. By doing this, you are able to perform an effective comparison when looking at your different loan offers. You also ensure that loan fees are not changed without your knowledge.

Your Loan and Your Credit

Your credit history is one of the elements that your loan rates and payment terms are based on. However, there are many other factors that are considered like you employment status, the value of your home, your outstanding debt, as well as any other financial obligations you may have.

For this reason, you should never assume that your less than perfect credit is ineligible for a home equity loan. Credit requirements often vary from lender to lender. Additionally, if your credit problems are not recent, you may be able to provide the lender with more recent credit references. This, along with any other proof you can provide to the lender could sway their decision in your favor. If, however, they still express a concern in your credit, consider paying off some of your debt and reapplying in six months to a year.

Making Good Use of Your Home Equity Loan

You are not obligated to disclose the reasoning behind your home equity loan or how you spend the money to your lender. However, there are some ways of spending the money that are more prudent than others.

The interest you pay on your home equity loan can be tax deductible. However, there are some uses for your home equity loan that are not only frugal, they double or triple your tax deductions. These options include paying a child’s tuition or making improvements to your home. Adding energy efficiency to your home, including energy efficient appliances can also be a wise and tax deductible choice. Avoid using the money for purposes that will decrease your family’s net worth.

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Understanding How Home Equity Loans Work

Posted on February 9, 2011 by admin

Understanding How Home Equity Loans WorkWhen making financial decisions, it is important to understand how they work. This can ensure you get the best options and safeguard you against scams and unethical practices. These rules hold true to home equity loans as well. In fact, a home equity loan is one of the biggest financial decisions you will ever make. For this reason, a great deal of consideration should be placed on understanding how these loans work.

Determining Equity

Your equity is the amount of ownership you hold in your home. To determine this amount, you would subtract the amount that you still owe on the home from the value of the home. While many lenders may offer you a loan that exceeds this amount, moving forward with it would cause you to be upside down in your loan. This means that you would owe more than the home is worth. You should, instead, leave some of your equity untouched. This would leave you equity to borrow against in the future if a financial emergency were to arise.

Types of Loans

There are two types of home equity loans; home equity lines of credit and second mortgages. They each work differently and often have different repayment terms. Understanding these terms can help you determine which loan is right for your financial needs.

A second mortgage would provide you with a lump sum of money. This lump sum would be placed on a repayment schedule, much like your first mortgage, only with slightly higher interest rates. You will also be responsible for fees that are similar to your first mortgage like closing costs and origination fees.

A home equity line of credit allows you to tap in to your home’s equity, a little at a time. You often have a term that you can borrow against your home’s equity, usually ten years. Once the term is up, you may be required to pay your balance in full. However, you may be able to find a lender that will allow you a repayment term for the amount you have borrowed. Just be aware that the longer you have the loan out, the more interest you will pay.

The Importance of Comparison Shopping

Comparison shopping is essential to getting the best loan terms. It will also safeguard you from unethical or dishonest practices that some lenders may try to use. You should always get loan information in a written agreement called a Good Faith estimate. This will protect you from rising interest rates. It will also give you material to compare when looking at the different terms that each lender has to offer.

Where to Find a Home Equity Loan

You can obtain a home equity loan at almost any financial institution. This includes brokers, credit unions, banks, and online mortgage brokers. Some lenders, like credit unions, will require you to qualify for services at their branch before you can be considered for a loan. However, all lenders should require you to qualify for the loan itself.

Avoiding Dishonest Lenders

While most lenders are honest and upfront, there are always a few bad eggs in the bunch. These lenders are often pushy and try to pressure you into a loan that you don’t feel comfortable with. They avoid answering questions about rates and terms. They fail to address your needs. They may even falsify documents. They almost always fail to give you a Good Faith estimate. Avoid these lenders and cut all ties.

What to Use the Money for

What you use the money on is, ultimately, your decision. However, it is important to keep in mind that you are borrowing against the ownership of your home. By using the money wisely, you can increase your family’s net worth and better your financial situation. However, misusing this money can create a higher debt for your family.

Some of the best uses for home equity loans include the purchase of another home, paying for college tuition, repairs around your home, energy efficient appliances, and retirement funds. Some of the worst ways to use the money include debt consolidation, vacations, vehicles, and luxury expenses. These uses deplete your family’s net worth and increase your overall debt.

Things to Look Out for

While not all of these practices are illegal or deceptive, per say, many of them are terms that you may not be looking for. This can cost you thousands over the course of your loan. Balloon interest, prepayment penalties, check writing fees, hefty late fees, and account maintenance fees are the most common deal breakers. These should be avoided, if at all possible.

If You Are Denied

If you are denied for a home equity loan, consider other options that can help you obtain the finances you need. Because credit is a big determining factor in your home equity loan application, you may consider spending some time working on your credit history. However, you can also be denied for having a high debt-to-income ratio. Try clearing up your credit or reducing your amount of debt. Your lender should disclose the reason for your denial.

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Types of Home Equity Loans

Posted on February 9, 2011 by admin

Types of Home Equity LoansHome equity loans have become increasingly popular for families and individuals who need to borrow large sums of cash. A number of variables contribute to this fact. However, one of the biggest reasons is that home equity loans usually have a lower interest rate than an unsecured line of credit. However, before committing to a home equity loan, it is important to remember that the money is loaned to you against your home. If you fail to pay back the loan, according to the terms, you could end up losing your home to the lender.

What is Equity?

Equity is the amount of difference between the total value of your home and the amount of money you still owe. Generally, home equity loan lenders will only use 75% of your home’s value when configuring the amount of money to lend. This is to protect the lender from any depreciation in your home’s value.

A home equity loan works similar to a mortgage. An interest rate is applied to the amount you owe and there are set repayment terms on the loan. When choosing your home equity loan, you have two different options to choose from; a second mortgage or a home equity line of credit.

Second Mortgage

Of the two types of loans, a second mortgage most resembles your original mortgage. Like your first mortgage, there are fees included in the process. These fees can include, but are not limited to, closing costs, administration fees, lender fees, pre-payment penalties, appraisal fees, and origination fees. However, there is a notable difference between your first mortgage and your second mortgage. Second mortgage rates tend to be higher than first mortgage rates.

In a second mortgage, your lender will allow you to draw a large sum of cash against the equity of your home. This amount is paid back over a specific period of time. Because this type of loan allows you to draw a large amount, you do run the risk of taking out too much money. If this happens, you end up paying interest on money that you didn’t need.

Generally, families and individuals use home equity loans for large financial obligations or purchases. Some of the most popular uses for second mortgages include student tuitions, home repairs, purchasing a vehicle, or debt consolidation. There are no specific guidelines on how you use the money from your second mortgage. However, some options are more prudent than others.

If you are planning to use your second mortgage to consolidate debt, there are some things you should consider carefully before moving forward. First, you should be certain that there are no other options for consolidating your debt, like debt counseling. While debt consolidation is a good thing, you must remember that you are placing your home up for collateral to pay off this debt. Second, you should also be aware that, if decide to proceed with the home equity loan, you should still seek some sort of debt counseling to help you learn how to change your spending habits. Without making changes to your spending habits, you will end up in the same situation, only worse.

Home Equity Line of Credit

A home equity line of credit, or HELOC, works differently than a second mortgage. You are still borrowing money against the equity of your home. However, the money is not given to you in a large lump sum. Instead, your lender will provide you with either a checkbook or a credit card that will allow you to draw against the equity of your home in small increments of money.

Most individuals choose this type of home equity loan because it allows them to have a line of credit for emergencies without having to pay outrageous credit card fees. While this may seem like an advantage over an unsecured loan, there are some notable disadvantages with acquiring a home equity line of credit.

The biggest disadvantage applies to the fact that you are using your home as your credit. This will reduce the amount of equity you posses. You also run the risk of losing your home if a job loss occurs or your financial situation changes. Because a home equity line of credit is a secured credit line, you cannot consolidate or settle this type of credit like you can an unsecured loan.

There may also be stipulations placed on how you draw against your home equity line of credit. There may be minimum amounts that you can withdraw each time and you may be required to carry a minimum outstanding balance. If you fail to follow these guidelines, you may have to pay extra fees. You may also be required to withdraw an initial amount upon acquiring your home equity loan.

Generally, home equity loans allow you a specific amount of time that you can draw money. This time period is generally ten years. At the end of the term, you may be required to pay the outstanding balance in full. However, there are some HELOC loans that will allow you to renew your term or allow you a fixed term for repayment of the outstanding balance at the end of the term.

While a home equity loan may seem like the answer to your financial troubles, there are some important factors to consider. A clear understanding in the terms and how each type of loan works can help you to determine if you are making a wise financial decision.

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