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What do you need to know about a home equity loan?

Jun.22, 2010 in Home Equity Loans Leave a Comment

What do you need to know about a home equity loan?

If you’ve already determined that a home equity loan is a viable option for you, make sure you ask yourself these important questions before you sign.

What is the interest rate, and will it change over the term of the loan?

If it’s a fixed-rate loan, the interest will stay the same for the entirety of the loan. If it’s an adjustable-rate loan, the interest rate will be adjusted periodically according to general interest rates. Make sure you find out if there is a cap on the rate if it does adjust.

What is the term of the loan?

This will tell you how long you have to repay your loan.

What will the monthly payment be?

Without this figure, it’s impossible for you to come up with a manageable monthly budget that includes your expenses like utilities, groceries, and other bills.

Is a lump sum payment due at the end of the term?

You may need to be prepared to write a large check when the loan is over.

Is there a penalty if you pay off the loan before the end of the term?

Some lenders will charge you a fee if you pay off your loan before the term is over.

What are the fees associated with the loan, and what is the estimated total?

You’ll probably be expected to pay some fees associated with processing your information and closing the loan. Ask your lender how much these fees will be so you know what to expect.

Under what circumstances can the lender call in the loan?

If you fail to make payments, some lenders will demand that you pay off the loan early.

What documentation do you need to provide?

You will probably need to submit information about your employment history, as well as your assets and debts.

When will you receive the funds?

It may take a while to process your information, so your loan may not be available immediately.

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What is a Home Equity Loan – 2 ?

Jun.22, 2010 in Home Equity Loans Leave a Comment

What is a Home Equity Loan – 2 ?

Surprisingly few consumers know much about these loans
By Broderick Perkin
Nearly 40 percent of all homeowners don’t know if the interest on home equity loans is tax deductible.
One third of home owners earning $50,000 or more believe the interest on equity loans isn’t tax deductible or they just don’t know if it is tax deductible.
Although 77 percent of home owners describe their ability to manage their personal finances as good or excellent, many of them appear to be somewhat clueless about home equity loans, according to a recent study by Chicago-based Bank One.
Blame that on limited home equity educational materials, home owners’ lack of experience with the loans and fallout from equity loan abuse.
“If you ever walk into a book store in the area where there is financial or budgeting books there are rows and rows of books on investing and maybe one or two that have anything to do with borrowing against your equity to improve your financial situation,” said Saundra Schrock, chief executive officer for Bank One’s consumer lending division in Wilmington, DE.
Schrock said a lack of eduction explains the startling finds discovered in a home owner study conducted by Edison, N.J.-based Bruskin/Goldring Research. From April 1 to April 3 this year, Bruskin randomly called 723 homeowners around the nation to produce the Bank One commissioned study which has a margin of error of plus or minus 3 percent.
“Another study we did showed there’s 3.2 trillion dollars worth of untapped equity in the hands of homeowners today,” Bruskin said.
Bank One is in the business to cash in on that much loose change, which makes its study considerably self-serving, but the report does reveal alarming facts about home owners.
The bank says the cost for obtaining $10,000 for one year is $1,800 for a credit card, $1,000 for the sale of stock, $900 to tap a (401)k plan or take out a personal loan and only $576 for a home equity loan.  The costs are based on a set of conventional assumptions about the interest rate and costs typical for each type of loan.
“If you find yourself in need of a sum of money, whether it’s to renovate your home, purchase a new car or consolidate debt, a home equity can be a very smart financial tool,” said Jordan Goodman, a personal finance expert, sought-after media source and author of “Everyone’s Money Book,” (Dearborn Financial, $26.95).
That may be, but 25 percent of the home owners surveyed said they’d use a personal loan to meet an unexpected expense of $10,000, not a home equity loan. Another 22 percent said they would dip into their savings, only 9 percent said they would use a home equity loan and 7 percent said they would borrow it from a friend or relative.
Only 28 percent of those questioned said they have ever used a home equity loan or equity line of credit, while 66 percent said they’ve used auto loans and 58 percent have used personal loans.
“It really doesn’t surprise me,” said Eric Tyson, co-author of “Mortgages for Dummies”.  “That’s why I have a job.  That’s why you have a job.  It’s confusing for no other reason than home owners have less first hand experience with equity loans.  And there are separate tax laws dealing with home equity” Tyson added.
Tyson also said stories about lenders with high-priced loans who prey on vulnerable home owners and the improper use of equity loans scares off some homeowners.
“Truth be told, there is a segment of the population that misused home equity loans.  People who, as home prices appreciate, go out and continually borrow more and more money on home equity because they feel wealthy.  Over time they raise their total indebtedness, beyond their ability to pay.”
Copyright © by Move, Inc.

What is a home equity loan?

Jun.22, 2010 in Home Equity Loans Leave a Comment

What is a home equity loan?

A home equity loan (sometimes abbreviated HEL) is a type of loan  in which the borrower uses the equity  in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower’s house, and reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one’s personal income taxes.

There is a specific difference between a home equity loan and a Home Equity Line of Credit (HELOC). A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate.

This is a revolving credit loan, also referred to as a home equity line of credit, where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due.

Typically, the interest rate is based on the Prime rate plus a margin.

When considering a loan, the borrower should be familiar with the terms recourse and nonrecourse loan, secured and unsecured debt, and dischargeable and non-dischargeable debt.

US traditional mortgages are usually non recourse loans. “Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable.” A US home equity loan may be a recourse loan for which the borrower is personally liable. This distinction becomes important in foreclosure since the borrower may remain personally liable for a recourse debt on a foreclosed property.

Home equity loans are secured loans. “The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower.” Credit card debt is an unsecured debt such that no asset has been pledged as collateral for the loan. Using a home equity loan to pay off credit card debt essentially converts an unsecured debt to a secured debt.

When deciding upon a type of loan, the borrower should also consider if the debt is dischargeable in bankruptcy. For instance, US student loans are “practically non-dischargeable in bankruptcy”.

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