Home Equity Lines and Home Equity Loans
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Lenders also offer No Closing Cost Mortgages to refinance first mortgages. Go to http://www.erate.com/refinance_no_points_no_fees.htm to get details.
Generally Home Equity Line of Credit funds can be obtained by check or at close of escrow.
Write checks up to the available balance of the line.
A Home Equity Line is an adjustable rate loan. As mentioned above this home equity line has check writing and credit card capability allowing you to draw funds only as you need them. You pay interest only on the funds that you use. This type of loan is great to cover periodic consumer and home expenses (i.e. an auto purchase, random home improvements) or can be used for emergencies. This is also a terrific way to finance expenses when you anticipate being able to pay down or pay off the equity line of credit periodically.
Home Equity Loan Shopping: Tips and Types
To find the best home equity loan, you need patience, tenacity and a little bit of luck. More importantly, you need to remember what’s at stake.
With a home equity loan, a personal loan borrowed against the value of your home, you are using your home as collateral. Finding a home equity loan that is inappropriate due to costs, fees, or other considerations puts your home ownership at risk.
In this article we look at some of the key considerations when shopping for a home equity loan.
Types of Loans
A home equity loan, often called a second mortgage, is a loan taken out with a fixed-interest rate. The loan is a one-time lump sum. The rate offered takes into account the APR plus points and other finance charges to process the loan.
In contrast, a home-equity line of credit, or HELOC, acts more like a credit card. Your lender extends a line of credit, and you can make continuing withdrawals within your limit. The interest for this loan is variable, based on APR without points or other charges.
Payments for these two different loans vary. With traditional home equity loans, payments are usually the same each month, including interest and principal. With a HELOC, payments will vary depending on the interest rate, how much credit you have used, and any options you have set forth with the lender.
There are significant benefits and risks with each type of home equity loan. A traditional home equity loan is a great choice for things like debt consolidation and single-purpose purchases (cars, medical expenses, college tuition, home improvements, and more). This loan is dependable, with low and fixed monthly payments and interest rates, compared to credit cards. In addition, interest may be tax-deductible, depending on specific circumstances.
HELOCs have some of the lowest interest rates and monthly payments of any consumer loans. Often used for debt consolidation, they are more flexible than traditional home equity loans, and application and documentation requirements are less demanding. Mortgage insurance is not required, reducing payments. Finally, interest may be tax-deductible, depending on specific circumstances.
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The biggest fee with home equity loans is interest. But just as with first mortgages, the hidden or unrecognized fees are the real pain. To take out a home equity loan or HELOC, borrowers are assessed closing costs including attorney fees, title search, document preparation and insurance, property appraisals, application fees. Depending on the loan borrowers may also incur annual maintenance fees, or transaction fees for HELOCs. Finally, fees may also be assessed in case the balance of the loan is paid before the term is up.
Since the two types of home equity loans are highly variable when it comes to interest rates and fees, direct comparison is difficult. That’s why many financial experts advise thorough shopping. With the advent of online lenders, this is increasingly easier for borrowers.
Compare programs offered by your bank, by other banks, and even by credit unions. Look for interest rates, payment options, and all the fees that will be included. Compile your questions for face-to-face or phone consultations. Ultimately, the loan you choose is dependent on your personal needs and goals.
When conducting online comparisons especially, watch out for unscrupulous lenders. Most experts agree that trustworthy lenders will only lend up to approximately 80% of your equity. This is a safe and forward-looking practice. It’s important, then, to avoid spam email and online offers that promise such opportunities as 125% loans. With a loan like this, not only do you face the normal risk of defaulting and losing your home, but also owing an additional 25%!
Keep your search to reputable lenders, ask lots of questions, and keep the risks in mind. This will allow your home equity loan search to be fruitful.
Credit Crunch Means Tighter Process for Home Equity Loans
The recent interest rate cuts from the Federal Reserve mean major benefits to many holders of home-equity loans and credit lines. But the reason behind those cuts, the burgeoning economic problems that may be growing into a full-fledged recession, mean those home equity loans and lines of credit are increasingly hard to get.
Beginning with the subprime plunge last year, lenders began tightening their standards and extending home loans with a little more hesitation, a process called a “credit crunch.” As a result of the subprime collapse spreading throughout the economy and around the world, those lenders are holding to their tighter credit, and are now turning to home-equity loans and lines of credit. They’re making their underwriting guidelines tougher, requiring higher credit scores and larger amounts of equity in homes. Increasingly, they’re also restricting the amounts of home equity loans.
Home equity loans borrow against the value of a home, offering a fixed amount of money repaid over a set period of time. Lines of credit may also borrow against the home value, but are more flexible and open-ended. Holders of home equity loans and lines of credit have benefited of late as the Fed has hacked away at the interest rate, meaning interest payments on these products have fallen significantly.
Obtaining a home-equity product has always been a little trickier than mortgages. Caution has always been the keyword with home-equity products as banks consider the loans to be riskier than first mortgages. Borrowers who default on mortgages must first take care of the first mortgage, meaning second mortgages (home-equity loans) will be repaid later. Since foreclosures and defaults have been hitting record numbers, banks are protecting themselves by becoming more stringent with second mortgages.
Borrowers are still seeking home equity loans in droves. Many may be opting to take out a second mortgage in order to improve their existing home, rather than face the poor housing market conditions and move into another home. Prime borrowers, those with good credit, income and equity, are still good targets for these products. But borrowers may need to be prepared to jump through a few more hoops, and prove themselves against stricter definitions of prime borrowers.
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