Home Equity Loans – second mortgage

Mary Wise asked:




Working as a financial consultant, I get hundreds of emails and calls everyday inquiring about many different financial products. I have noticed that home equity loans are a very common source of doubt for my customers. As regards home equity lines of credit… well, let us just say that great many people do not even know of their existence. It is a real pity that these products are not better known because they are incredibly versatile as they can be used for many different purposes. They are also very cheap sources of finance.

That is why I decided to write an article on the basic concepts of both of these fantastic financial products.

Home Equity Loan

Home equity loans are usually referred to as second mortgages, because they are secured against the value of the house. The borrower uses the equity on his property as a collateral for the loan. So… what does equity mean? Equity is the different between the property’s market value and the remaining balance of the mortgage and any owed debts related to the property. If you have finished paying the mortgage on your home (or never applied for one), then the equity on your home is 100% of the real value. If you have already paid 40% of the home, then the equity will be worth 40% of the real value of the property.

Loans based on the equity on your home are marvellous. They are granted almost to any home owner and their terms are usually extremely favourable. Not only are the interest rates very low, but they are also deductible!

What use can the borrower give to the money? Well, that is the beauty of this type of loan. You can do anything, the world is your oyster! Whether you need to remodel your house, add rooms to it, go away on a long vacation, purchase a used or new car, or even acquire a second property, home equity loans can help you in so doing. There is no limit to what you can do, only your imagination.

Repayment plans range from 5 to 20 years, and as you might have noticed, they are somewhat shorter than the repayment plans on mortgage loans.

Home Equity Lines Of Credit

This credit is also know as an open-end home equity loan. It is also a loan based on the equity on your home, but it has one major difference: you decide how much and how often to withdraw funds. The lender sets a limit on how much can be withdrawn, but once this amount is repaid, the borrower can take out funds again, and so on.

Lines of credit based on equity are perfect for you if your monthly income is variable (as often happens with self-employed people). There is a minimum monthly payment which consists of the interest rate if you have not withdrawn any funds.

If what you are looking for is flexibility, then a line of credit will be just perfect for you. No fixed monthly payments, instant availability of funds at your best convenience, among other advantages.

Now you are fully aware of what these two equity based credit products have to offer, it is up to you to choose the one which best meets your requirements.

Margaret

Clinton W asked:


Would these debts be “forgiven” also and if so, does this affect your house which was used to achieve the loan?

Gabriel

Clinton W asked:


Would these debts be “forgiven” also and if so, does this affect your house which was used to achieve the loan?

Nathaniel

Filipinoy asked:


I have a friend who is very desperate because of all the debts, shortsale/foreclosure of his house, mounting credit card bills, etc, want to just leave the country for good to start anew. What would be the possible consequences of this? Will it clear all his debts, if he comes back to the US after 3 years would he be in trouble?

Beverly

Aekkapol Kongvicheinwat asked:




Home equity loans have increased in the recent times. If a person decides not to refinance his first mortgage and instead wants to have cash out of debt consolidation, then companies are lending their helping hand by lowering the refinance cost and increasing their homes’ Equity. A home owner can borrow against the value of his house by two ways. One is called home equity line of credit and the other one is a home equity loan. Both are generally considered to be a second mortgage. While with the first one a person can draw amount up to a predetermined limit, whenever there is need for money. The other option provides for taking a lump sum by paying a fixed payment monthly over a period of time.

The amount drawn in each case will be based on several factors such as the income of the borrower, his debts if any, value of his home and his credit history. Both types of loans are appealing in their interest rates because they are secured against home. Often both these loans are tax deductible. Choosing either option depends on individual financial conditions. If a person needs to meet the expenses like college fees or medical bills, then Home Equity Line of Credit will best suit him. But both loans carry higher interest rates as compared to first mortgage.

With these loans, there are again two more options available. One is adjustable rate and the other is a fixed rate. And there will be closing costs which must be taken in to consideration. One can be free from any worry about increasing costs should interest rates rise. Home Equity Line of Credit provides lower initial rates as compared to loans. But there is a risk of more interest rate due to its fluctuating rates. But there are no closing costs for these loans. If a person gets tempted with the second type of loan, then he must be cautious as to not get in to more debt. Failing to repay will give way for the risk of losing his house.

To qualify for this credit, a person needs to provide proof of income, home ownership, and details about how much equity he has in his home. At least 20% of the value of the home must be paid off. An appraisal will help a lot.

Elaine

James T Allen asked:




Is a home equity loan a smart debt management decision? The short answer is – it can be. But BEWARE!! Discipline is the key to successful debt management with a home equity loan. Not to be mean but lack of discipline probably played a bit of a role in you getting into debt in the first place.

With that being said, lets take a look at what exactly a home equity line of credit (HELOC) is and how it could possibly work in debt management. First of all – Do you qualify for a HELOC loan? In this economic climate, that could be tough especially if your finances and debt is a little out of whack. Before you get too wrapped up in the process, check with a bank or two to see if an equity loan is even a possibility.

If it is or might be, some individuals have successfully used a home equity loan as part of their debt management program. You can use the collateral in a home equity loan to help with your debt consolidation and ultimately manage your debt a little easier. Keep in mind though that you still have the debt, it is just structured in what is hopefully a more manageable way.

When you have a this type of loan, you can use secured debt to pay off your outstanding bills. A credit card debt is unsecured collateral. A home equity loan, however, uses the collateral of your home to give you the equity you need for debts like bills.

You can take advantage of the lower interest rates available through your bank with a loan of this type. The interest rates will help you pay off your debts at a faster rate, which is smart debt management. You will be able to get out of debt more efficiently and will pay less in interest over time.

Like I said before if you are using a home equity loan for debt management, you will need to be very disciplined. If you are late with a credit card payment, you will receive a call from a collection agency. But if you are late with a home equity loan, the bank can take away your home. Nevertheless, if you are disciplined, you can use your home equity loan to help pay your debts through superior debt management.

One last thing – Pay off your debt with a HELOC and that’s all. Don’t allow yourself to increase your debt when you receive the additional funds or spend the money on anything but your debt. Don’t compound you current problem. This is that discipline thing I keep harping on.

Eva

Acanthus489 asked:

DEBT CONSOLIDATION LOANS Bad Credit Debt Consolidation Bills and debts getting a little out of hand? Lower your monthly payments by consolidating them into one low payment. You can consolidate anything. Credit cards, car loans, personal loans, second mortgages anything and everything! We…

Brenda

Veritas et Aequitas () asked:


Okay I asked this question before, however I wasn’t clear on some things.

My mother passed away recently and there is a home that I have been making payments on using her money from a joint account. That money has run out. I will be named executor in a few days, however a mortgage payment is due at the same time.

I do not want to put any money into the home not having any security. She has massive medical bills (even with insurance) and some other unsecured debt.

I want to keep the home and it has supposed equity however it wouldn’t sell for more than what is owed on the home so there is no actual equity, more so because last in 2005 she took out a second mortgage for home improvements.

I want to keep the home and I will pay off the home in full, however not at the expense of being held liable for her debts. It would break my heart to not have time to grieve and go through her belongings.

I will be talking to counsel soon however I am losing my mind in the moment, it’s too much.
They can take everything if they want, because my mother’s soul doesn’t reside in her belongings. I just know in the end they won’t get anything because of obligations before them such as tax and court fees, etc. There is no money to pay them.

DAVIS

Crystal Mate asked:


In a November, 2007 report, the Canadian Association of Accredited Mortgage Professionals (CAAMP) stated that in the previous 12 months, 17% of mortgage holders took out home equity loans or increased their mortgage. The average equity loan was $35,400.

What are people doing with all this money? Paying down debts, sending the kids to school, investing in their homes – there are many possible answers to that question. If you’ve ever considered tapping into your home’s equity, the following FAQs can help you decide whether home equity loans are the right strategy for you.

What Are Home Equity Loans?

Home equity is the difference between the market value of your home and what you still owe on the mortgage. So if your house is valued at $300,000 and you still have $260,000 outstanding on your mortgage, your equity would be $40,000.

Home equity loans enable you to borrow against that equity. These loans are also known as second mortgages because they are a second loan (the primary mortgage being the first) that uses your house as collateral.

How Much Can You Borrow?

With most home equity loans you can borrow anywhere up to 85% of the amount of your home equity. For the case above, with $40,000 in equity, the homeowner could borrow $34,000.

Some lenders have more generous options, even offering to lend 100% of the amount of equity in your home.

How is a Home Equity Line of Credit Different?

A home equity line of credit (HELOC) is much the same as a standard line of credit, but it uses your home’s equity for security. With a HELOC you can typically borrow up to 90% of your home’s equity. With $40,000 in equity, you could obtain a HELOC for $36,000.

With a HELOC, you do not necessarily have to use all of the credit at once. You can use it as needed and pay back what you borrow, just like a standard line of credit.

On the other hand, home equity loans are one-time, lump sum loan. If you need more money, you’ll need another loan.

The general guideline is that a HELOC is best for those who need access to varying amounts of money for ongoing expenses, whereas a home equity loan is better suited to those needing a specific amount for one large expense, like a home renovation.

What About Interest Rates?

Home equity loans typically have fixed interest rates, while HELOC rates are variable. The interest rates for both are typically pegged to an institution’s prime rate, and are often significantly lower than those charged for vehicle loans, credit cards and personal loans.

What is Mortgage Refinancing?

With refinancing, you pay off your existing mortgage and obtain a second mortgage for a lower interest rate. With a “cash-out” mortgage or refinance you can borrow more than what you owe on your mortgage. You can then take the extra money and use it for expenses like tuition, home improvements and so on. Refinancing may include costs for mortgage fees and prepayment penalties.

What are the Pros and Cons?

On the plus side, home equity loans provide low-cost credit for important expenses. In extreme cases, the risks are that the home market slows and you end up owing more than the value of your home, or that you overspend and default, which means the loss of your home.

For many people the pros outweigh the cons. To be sure if a HELOC or loan is right for you, it is best to consult with a mortgage professional.



ERICH

Prerna Joneja asked:


Home equity loan can be a difficult concept for the people who have never dealt with home ownership earlier. So, we define equity as the financial value of a property or business beyond any amounts payable on mortgages, liens, claims, etc. In short, home equity is how many houses the person has earned.

Equity is basically the difference between the market value of a property and the claims held against it. It is the difference between the price for which a property could be sold and the total debts registered against it. For example, if your house is worth $150,000 and you owe $110,000 then your equity is $ 40,000. Then, you get home equity loan depending on the credit and many other factors for $40,000 that you have built up in equity.

There are two types of Home Equity Loan:

Standard Home Equity Loan

Home Equity Line of Credit

Standard Home Equity Loan is the loan that is assured by your home or is secured by the equity in a home. This type is a better option if you need a large amount of loan and for long term.

Standard home equity loan is also known as Second Mortgage or equity loan. Home equity loan can help people pay off their big interest rates, non tax-deductible customer’s debt or meet some other short term needs.

A standard home equity loan is a closed-end loan that can have a fixed term, a fixed rate, and fixed monthly payments. It can carry a variable finance charge rate that switches with a federal interest rate. The amount of the loan is usually made available in a lump sum.

Home Equity Line of Credit is a loan option if you need a smaller amount of loan and for short term. This loan type provides you an option of withdrawing money from an equity account when you need it. The home equity line of credit is an “on demand” source of funds that a borrower can access and pay back as needed.

This type of loan has fluctuating rate of interest. The borrower has to only pay the interest if he carries a balance because this line of credit are essentially a revolving line of credit, like a credit card but with a much lower rate because the line of credit is secured by your home. The borrower can tap the credit line simply by writing a check, and pay back the loan as quickly or as slowly as the borrower like, as long as he meets the minimum payment each month.

Benefits of Home Equity Loan are:

Home Equity loan can be the best option if you need to repair or reconstruct your home for debt consolidation or for medical or educational expenses.

It can be used to get rid of credit card debts.

It can be used to meet your educational loans.

It can be used for investment in other real estate.

It can be used to pay off your medical debt.

It can be used to refinance your other debt.

It can be used for home improvement.

It can be used for some major purchases and expenses.

It can be used for debt consolidation.

Home Equity Loan can be used for home improvement projects because home improvement can be costly and paying that cost might be difficult. Home equity loan provides good interest rates.

Studying in a college has become very expensive these days. Home equity loan can also be used for paying college expenses. This type of loan helps people who have financial problems so that they can afford the college expenses.

It does not matter what is your decision but whenever you take a home equity loan it should be taken from a trusted and well reputed lender. As a whole, home equity loan is a better option while taking loan because it is beneficial in all aspects.



KIM