Home Equity Loans – second mortgage

Tab Pierce asked:




You might ask yourself: if a mortgage is for buying a house, why would some borrowers need a 125% home equity loan? A house costs, per definition, 100% of its value, so why the additional 25%? As a matter of fact, many borrowers need it, and even if many lenders don’t offer mortgage that high, it is still possible to find such deals.

125% home equity loans are intended principally for people who bought a house and need to renovate it. Or for borrowers who already have a first mortgage and want to consolidate some debt. Or for borrowers who have some unpredictable problem, like a medical bill or a broken car and just need more funds.

Lenders of 125% home equity loans use your home as collateral for a part of the loan and check thoroughly your income, since it is the guarantee of the other part of the payment. As in other form of loans, a good credit score is also essential.

One drawback of a 125% home equity loan is perhaps that it is almost impossible to get a prime rate for it. Due to this fact, most borrowers won’t use it as a first mortgage. Most borrowers will take an 80% to 90% mortgage as their first mortgage and, if needed, apply for a loan that reaches 125% of the appraised value of their home.

The terms of a 125% mortgage can be as long as of any other mortgage, with prime interest rate or not. It runs from a couple of years up to 30 years and even more in certain cases.

If you decided that you want a 125% mortgage than you normally need to show some proof of income, proof of home ownership, documents of your first mortgage and how much equity you already have in your home (that is value of home minus value of the mortgage). An appraisal is sometimes not necessary, if the appraisal for your first mortgage is less than 12 months old. Sometimes lenders use an algorithm to estimate the value of your home and lend based on this calculation. It is important to shop around not only for better interest rates, but also for better conditions.

The appeal of this kind of loans is its interest rates, which is normally lower than the interest rates of credit cards and consumer loans since they are secured against a home. Additionally, the interest that you have to pay on a home equity mortgage, no matter if it is for 80% or 125% of the value of the property, is mostly tax deductible (consult your tax advisor to know exactly if this applies to you).

If you are considering expanding your loan to consider a 125% home equity loan than take time to study and learn about it, going into this with full understanding will help you.

Stephanie

Alan Lim asked:




Determining your score

To improve the credit score so that you have the best possible terms on a home equity loan, the first step is to learn all you can about the items recorded on your credit reports. There are three major credit bureaus and each of them may have different information. Some or all of the credit bureau reports can contain errors that should be corrected. There are precise procedures that must be followed in order to clear inaccurate, duplicated or missing information. It is possible to complete the cleanup process yourself, or there are companies that specialize in clearing up the information.

What role do credit bureaus play?

Credit bureaus collect information about individuals and present it in a consistent form to lenders, promotional businesses and landlords among others, in order to demonstrate the creditworthiness of the individual. When an individual applies to a lender for a home equity loan, the credit report of the potential borrower will be requested from one or more of the credit bureaus. Usually, the report is presented in the form of a FICO score. This score is a numerical value that tells the lender how the borrower ranks according to the bureau’s algorithm.

Improving the score

Before applying for a home equity loan, you should review your credit score and take steps to improve the score. First, call for a current credit report from each of the three major credit bureaus. Each is required to provide a free report each year upon request. Then carefully review each item and make certain that you understand what the terms and markings indicate. Take note of each incorrect item and follow the instructions provided by the credit bureau to dispute the incorrect information. You should document each step of the process and don’t give up until the report is as accurate as it should be.

Removing negative entries

Current legislation provides a number of different ways that consumers can force the credit bureaus to remove inaccurate information. You can also stop the sale of your credit bureau information to companies who purchase such information either to try to collect on old and sometimes nonexistent debts. Negative entries will lessen the chances of good terms for the home equity loan for which you apply. For example, too many inquiries will lower your credit score. A history of frequent moves can hurt your chances. You can lose good terms on a loan because you’ve held too many jobs recently.

Fixes to avoid

Adjusting the credit score can be fairly simple to do, so it is not necessary to pay someone else to correct your credit score. In fact, some less than scrupulous businesses take your money, but don’t do much toward correcting errors. Don’t waste your money on one of these. You should also avoid blanket disputes online or by mail. The credit bureau will often consider such efforts frivolous and refuse to investigate the dispute further. The time you spend in correcting legitimate errors will pay off in reduced terms for your home equity loan.

Leo