Basics of Home Equity Loans

A home equity loan is secured by the equity you have in your home. Equity is the difference between how much your home is worth and how much you own on the mortgage. Lenders may offer as much as 75% to 90% of equity as a loan amount. This kind of a loan is a sound choice for meeting some financial needs as it offers low interest rates of a secured loan and may also have tax deductible interest.

There are two types of home equity loans – lump sum home equity loans and home equity lines of credit, also known as HELOCs and work like credit cards. Both these are often referred to as second mortgages, because they are secured by your property.

Lump sum home equity loan – is a one-time, up-front loan where you receive the full amount of the loan when it is opened and pay it back in fixed monthly installments at a fixed rate of interest. Your payments can be fully amortized or may consist of only interest with a balloon payment of the balance money owed at the end of the term of the loan. Once you get the money, you cannot borrow further from the loan. This kind of loan is good for home improvements, debt consolidation, purchase of large expenditure items like a car and paying unexpected and large bills like medical expenses.

Home Equity Line of Credit - allows you to have a maximum loan amount available which you can draw on as and when you need, usually by writing a check. Its revolving balance makes it similar to a credit card. You monthly payment is generally a percentage of the total outstanding principle. HELOCs are thus more flexible then lump sum home equity loans and allow you to borrow and pay back only when required. A line of credit has a variable interest rate that changes over the life of the loan.

With either a home equity loan or a HELOC, you are required to pay off the balance when you sell the house.

Home equity loan rates differ from lender to lender so it would be worthwhile to shop around for the best and the lowest interest rate. Compare the Annual Percentage Rate (APR) which indicates the cost of credit on an annual basis. Also consider other charges such as points and closing costs which will add to the cost of your home equity loan. Additionally there are different types of home equity loan rates like fixed and variable. Most home equity credit lines have variable interest rates. These variable rates may initially offer lower monthly payments, but during the rest of the repayment period the payments may change and may be higher. Fixed interest rates, if available, may be slightly higher initially than variable rates, but fixed rates offer stable monthly payments over the life of the credit line.

Qualifying for a home loan:
Although there are no fixed rules, lenders look at two key factors while approving home buyers for the type and amount of mortgage they want – the borrower’s ability and willingness to repay the loan. Ability to repay is verified by your current status of employment and total income. Willingness to repay depends on the how the property will be used, for example will you be living there or just renting the property. It also depends on your fulfilment of previous financial commitments.

William Brister
http://www.mortgageproguide.com The basics of investing and personal finance. Useful information on investing in precious metals, stock options, mutual funds, bonds, annuities and other money making instruments.

This entry was posted on Thursday, April 26th, 2007 and is filed under Home Equity Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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How Credit Scores Affect Mortgage Applications

With a good credit score an applicant will receive prompt response from many lenders, all of them offering low interest rates and low down payment options. The loan amount offered also may be high. On the contrary a low credit score would result in a lot of rejection from various mortgage financers. Because creditors wouldn’t come forward easily to give credit to individuals that have a history of difficulty in repaying existing loans. After all, creditors take risk when they finance mortgages against the credit history of a debtor. Naturally, they will wish to remain on the safe side and pick up less risky ones that have good credit histories. A good credit score means less chance of missing on payments and therefore less risky.

But there are some real risk takers that will come forward to finance mortgages for individuals with bad credit scores. They would charge high down payments and always high interest rates though. They may also fix additional charges for every little paper work and may charge high closing rates. The loan amount offered will also be considerably less. The individual with poor credit scores will not have much choice but to accept the terms and conditions as there are no other alternatives. This is a tight situation and to avoid this you must have a good credit score.

People with bad credit may fall in to the trap of ’secured loans’. Secured loans are the ones where the loan applicant offers an asset as collateral security. The lender becomes secure about the repayment of the loan and not the borrower. Securing a loan with bad credit score becomes easy only when the applicant is willing to offer some asset as collateral security. This again is a very dangerous situation where an individual runs the risk of losing his entire collateral asset in case of failing to pay the loan installments in time. An individual should always avoid such type of a loan.

Resort properties normally require large amounts of finance which a person with bad credit may find it difficult to obtain. So it is always advisable to keep your credit score high. Incase the credit score becomes low due to unavoidable financial reasons it can be improved upon. There is no need to lose hope simply because a person has a low credit score. If the property that he intends to buy has good equity he should go out and try to obtain finances for it. There are many sub prime lenders willing to offer their services.

For a review of your credit report as it relates to a mortgage loan and a consultation on the best loans available to you, give us a confidential, no obligation and no cost call.