Home Equity Loans – second mortgage

Julian Lim asked:


  

A home equity loan or home equity mortgage is an effective second mortgage on your home, taken out after you have developed some equity in your home. For example, if you purchase a home for $200,000 and you have paid $40,000 over the years against the loan principal and the market value for the home is now $250,000, you now have equity in the home of $90,000.  Theoretically, you could apply for a $90,000 loan against the equity, but in practice, most lenders prefer to keep the loan at 80% loan to value or, in this case $187,500.  In this example, a loan for $27,500 could be approved.

 

Definitions

 

Some of the definitions that you will need to be familiar with include equity, mortgage, interest rate, loan fees, loan type, principal and amortization.  If you don’t understand the meaning of these words and others insist on an explanation from the loan broker or lender.  You can also do the research yourself so that you are certain you understand the difference between an ARM and a fixed rate loan and why you should choose one or the other, depending upon your circumstances. There are some very good primer level books and classes on almost any subject you can name out on the internet including that of a home equity loan.

 

Terms

 

In the case of a home equity mortgage, the word ‘terms’ can mean ‘words’ or it can mean the length of time before the loan is paid off.  A loan against the equity of your home often will have a longer term than a personal loan.  You may see terms of 15 years, 20 years, even 30 or 40 year terms on the loan.  Of course, the longer the term, the more money in interest you will be charged and the larger the percentage of funds you pay are for the privilege of using the money rather than for the money itself.

 

Rates

 

The home equity loan rates are also called interest rate or interest. Interest rates are usually structured in one of two ways, although there are other types of loans as well.  The fixed rate loans set an interest rate up front and it remains in effect throughout the term of the loan.  The adjustable rate mortgage loan has an interest rate that will vary according to a predetermined index or formula.  For example the rate may be two point above prime rate, adjustable not more than twice every two years.  These requirements will vary depending upon the economy of the time.

 

Advantages and Disadvantages

 

A home equity loan or home equity mortgage has the advantage of being a lump sum of money that you can use in any way you see fit–presumably legal.  It has the disadvantage of increasing your debt loan and increasing the cost of money sometimes significantly. For example taking out was is actually a second mortgage on your home may raise your debt to value level to the point where private mortgage insurance is mandated by many lenders.  This can add thousands of dollars to the repayment amount over the years.

 



GIOVANNI

Julian Lim asked:


A discussion of the nature, benefits and operational methods of a home equity loan in simple, easy to understand language is helpful in deciding whether or not such a home equity mortgage should be acquired.

A home equity loan or home equity mortgage is an effective second mortgage on your home, taken out after you have developed some equity in your home. For example, if you purchase a home for $200,000 and you have paid $40,000 over the years against the loan principal and the market value for the home is now $250,000, you now have equity in the home of $90,000. Theoretically, you could apply for a $90,000 loan against the equity, but in practice, most lenders prefer to keep the loan at 80% loan to value or, in this case $187,500. In this example, a loan for $27,500 could be approved.

Definitions

Some of the definitions that you will need to be familiar with include equity, mortgage, interest rate, loan fees, loan type, principal and amortization. If you don’t understand the meaning of these words and others insist on an explanation from the loan broker or lender. You can also do the research yourself so that you are certain you understand the difference between an ARM and a fixed rate loan and why you should choose one or the other, depending upon your circumstances. There are some very good primer level books and classes on almost any subject you can name out on the internet including that of a home equity loan.

Terms

In the case of a home equity mortgage, the word ‘terms’ can mean ‘words’ or it can mean the length of time before the loan is paid off. A loan against the equity of your home often will have a longer term than a personal loan. You may see terms of 15 years, 20 years, even 30 or 40 year terms on the loan. Of course, the longer the term, the more money in interest you will be charged and the larger the percentage of funds you pay are for the privilege of using the money rather than for the money itself.

Rates

The home equity loan rates are also called interest rate or interest. Interest rates are usually structured in one of two ways, although there are other types of loans as well. The fixed rate loans set an interest rate up front and it remains in effect throughout the term of the loan. The adjustable rate mortgage loan has an interest rate that will vary according to a predetermined index or formula. For example the rate may be two point above prime rate, adjustable not more than twice every two years. These requirements will vary depending upon the economy of the time.

Advantages and Disadvantages

A home equity loan or home equity mortgage has the advantage of being a lump sum of money that you can use in any way you see fit–presumably legal. It has the disadvantage of increasing your debt loan and increasing the cost of money sometimes significantly. For example taking out was is actually a second mortgage on your home may raise your debt to value level to the point where private mortgage insurance is mandated by many lenders. This can add thousands of dollars to the repayment amount over the years.



QUINCY

Kirrhi Kreamer asked:


A home equity loan is often referred to as a second mortgage and it allows homeowners to borrow money using the equity they have already built in their homes. With a home equity loan, homeowners can borrow up to $100,000. The interest on the loan is tax deductible, which brought home equity loans to popularity in the 1990s when the economy was not so good.

There are two types of home equity loans. One type is a fixed rate loan and one is a line of credit. Both loan types have terms ranging from five to fifteen years and both must also be paid in full if the house is ever sold.

A fixed rate home equity loan provides the borrower with a lump sum payment. It’s assumed that the borrower will pay the loan off over a set period of time with interest. The payments are usually paid monthly and remain the same amount over the entire life of the loan. The interest rate also remains the same over the life span of the loan.

A line of credit home equity loan works with a variable interest rate and uses the same principles as a credit card. It generally even comes with a credit card. Borrowers will be approved for a certain amount by the lenders. The borrower can then use this money by using the card or the special checks that the lender will provide. These payments will also be made monthly however the monthly payment will vary depending on what the current interest rate is and how much money was borrowed that month. When the term of the loan is up, any outstanding balances borrowed must be paid in full.

Home equity loans work well for homeowners who need a large amount of money fairly quickly. The homeowner may need the money for such things as paying off another loan, tuition money, home improvements, or other unexpected expenses. Home equity loans are a good option over other loans because the interest rate on them in generally quite low and is definitely lower than the interest on credit cards and other loans. Because of this, it makes good financial sense to pay off a credit card loan while using a home equity loan. It allows the homeowner to have one single monthly bill, a lower interest rate, and a loan that is partly tax deductible.

Home equity loans have many advantages for lenders as well. After the lender has collected on the original mortgage, they then are able to collect more payments and more interest. The lender is also entitled to keep all the money from the original mortgage and the home equity loan if the borrower defaults on payments. The lender is also allowed to repossess the home, sell it again and begin the cycle all over again with the next owner.

Home equity loans can be a very wise financial decision when homeowners are trying to lower their interest rates and pay off unforeseen expenses. Borrowers must carefully weight the advantages and disadvantages of taking out a home equity loan to see if it is the right choice for them.



SALVADOR

Levetta Rivera asked:


A home equity loan allows you to cash-in on the equity you have built-up in your home. The funds you receive can be used for debt consolidation, home improvement, college education, investments or any purpose. With a home equity loan your home is used as collateral to secure the loan. If you default on the payment you can lose your home so it is important to insure that you can afford to take out the loan before you sign on the dotted line!

Many homeowners get a home equity loan to consolidate bills. This can be a great strategy if you are overburdened with high interest credit card and/or consumers loan debt. A home equity loan can usually be obtained at a lower rate and all or a portion of the interest you pay on the loan may be tax deductible. If you are considering a home equity loan to consolidate your debt it will be wise to cut up your credit cards and close out the accounts. The last thing you want is to take cash-out of your home and end up back where you started from because you did not have the discipline to stop using your credit cards!

A home equity loan can also be a great source for obtaining cash to make home improvements. Next to debt consolidation, home improvements are the 2nd most widely used reason that consumers obtain home equity loans. Depending on what kind of home improvements you are making, it can increase the value of your home which may help to justify the added monthly payment expense you incur when you obtain a home equity loan.

A home equity loan can either be in the form of a fixed-rate loan or an adjustable-rate line of credit. With a fixed-rate home equity loan you receive all of your money in one lump sum and the amount of your monthly payment is the same for the duration of the loan term. With an adjustable-rate home equity line of credit you are approved for a credit line amount in which you can draw from as needed. In most cases you will only pay interest on the outstanding amount and your interest rate is subject to change. As such your monthly payments may vary depending on the outstanding loan amount and interest rate in any given month.

There are many home equity loan lenders online who will lend to people with good or bad credit. You may want to compare the rates and programs of several lenders before making your decision to increase your chance of getting the best possible deal. Also, consult with your tax advisor to see how much of your home equity loan interest will be tax deductible.



GABRIEL