Home Equity Loans – second mortgage

Joe asked:


We plan to use a home equity loan to rebuild our studio, putting the loan money in a separate bank account and using that account solely for “construction costs” to ensure the interest remains tax-deductible.

Question 1: We’re paying an architect to design the building and we have to pay the city a permit fee to review and approve the design. Are these two fees considered part of the “construction costs” of a building so we can use the loan to pay these without worrying about the IRS coming after us?

Question 2: Given this scenario, would it be wiser to use a Home Equity Line of Credit so we only borrow what we need when we need it? My concern (as always) is variable interest rates on the lines of credit, so I’d get a lower interest rate today, but it might be higher next year.

Thanks!

Joe

Leon

Nicholas W Partridge asked:




Home equity loans are a type of loan in which the borrower uses their own home’s equity as collateral. These loans are very useful for financing big expenses, such as education, medical bills or repairs to your home. It creates what is called a lien against the borrowers home, and therefore reduces the actual equity of the home.

Most home equity loans require a very good to excellent credit history and a reasonable loan-to-value ratio. In some areas, these loans are referred to as second mortgages.

Many people get confused between these loans and the home equity line of credit, the difference being that a line of credit can be drawn upon for funds at any time and often comes with an adjustable interest rate, whereas a house equity loan is a one time fixed lump-sum, usually with a fixed interest rate.

As for whether or not this type of loan is suitable for you really depends on your circumstances. If you have a lot of equity built up in your home and you’d like to release some of it, then using your equity is probably a good option. Just be aware that banks view these loans as slightly more risky than other types of loans, and will therefore charge a higher interest rate. It’s generally advised to use the funds for major necessities only, as opposed to things like holidays or boats.

Conclusion

Home Equity Loans are great for those of us who have nearly paid off their homes and are looking for quick funds to renovate the home, pay off some medical bills or other larger expenses.

Antonio

Rick Swanson asked:




When applying for a home equity loan, keep in mind that like most loans, there are always a host of fees. Usually the interest rates for this type of loan are much lower than those of a credit card which is a plus but be sure you understand all costs that will be associated with the loan before you sign on the line.

The main cost to consider is the interest rate. Different types of home equity loans come with different types interest rates. If you are getting a closed home equity loan, which is a single loan, it traditionally will have a fixed interest rate. If you are considering a home equity line of credit, know that it usually will have a variable interest rate. The two types of loans are quite different so expect a discrepancy in the rate of interest for each.

With the home equity line of credit, often every time you borrow from that line, you may be asked to pay a transaction fee. But with all fees, it never hurts to ask for them to be waived or reduced. Often lenders waive certain fees as an incentive to use their company. So do your research!

Both of these loans are treated much like a mortgage. So like your initial home loan, expect that you will have closing costs, attorney fees (if they prepare the legal documents) and insurance fees to pay. You’ll more than likely also encounter an appraisal fee. It’s usually required to have an official home value established before the loan amount can be properly determined. Just keep these all in mind when deciding on whether or not getting a home equity loan is right for you.

Unfortunately, fees are a necessary evil when it comes to getting any type of loan so be prepared to analyze the whole picture. There’s always more to consider than just your monthly payment. And since it’s your home you are putting on the line, it’s so important to understand every fee that will ultimately be associated with the loan. There are so many options out there for home owners. Just be a savvy consumer and get all the information before committing to anything.

Marie

Hans Sept asked:




Home equity line of credit with varying rate will help you to save some money, but fixed rate of interest will benefit you more as you can predict the income you are going to get out of it. You can use this fixed rate of interest to repay your loans as does the expected amount does not change every month. There are so many reasons why people opt for fixed rate home equity credit and you may know about them here. Two main reasons are for improving their homes and repay their debts.

If you are living in an old type of home and want to repair it by laying floors or other renovations you could go for fixed rate of interest. This is an ideal choice as the changes you make would increase the value of your home. When you consider the present value of your house, you are really going to add more value to it and so the worth of your house is going to increase for sure. But don’t make any changes that will not add value to it when you will be selling it. The surrounding neighborhood value has lot of influence in determining the value of your house and so any expenses you are going to spend on renovation that will not increase its worth than that of the neighborhood will not benefit you.

When you spend money on your house make sure that you will be able to take it back when you sell the house. Don’t add any new features to your house that is not in the neighborhood houses for they might go a waste. If you want to make a purchase for a higher amount or to take a vacation abroad or if you want to build a swimming pool at the back yard you might want to take home equity line of credit. But make sure that you have enough resources to pay the debt back and plan accordingly.

Calculate the rate of interest and the total amount of money you need to pay when you take the loan. Suppose if you need 10,000 dollars for some purpose when you calculate the interest you might have to repay more than 14,000 dollars and so it is always better to plan such things out of your savings. But home equity loan and line of credit are different though both could be used in the same way.

When you use the credit for major reasons like buying a car or something else, for which you may have to pay higher rate of interest, you are probably taking a wise decision as in the case of line of credit, your monthly installments get lowered after paying the due for certain number of months and the interest rate also gets lowered. So you can use this to repay your debts that have more rate of interest.

Nathaniel

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

Jim Aldridge asked:




Need cash fast but can’t find the right resources? Or perhaps because you have a not so decent credit score? Whichever the case maybe, home equity loan might be the right fit for you. Of course, this only applies if you own a home.

Unlike the usual refinancing, these are just small loans which allow a borrower to pay an existing loan. While refinances take quite a while to process, home equity loans are more efficient. Since the equity of the borrower’s house serves as the main collateral, lenders feel more secured hence release the loan quickly. This means that in the event you are unable to settle the payment, you will be at risk of losing ownership of your house.

There are certain types of home equity loan such as Home Equity Loans, Home Equity Lines of Credit and Bridge Loans.

Home Equity Loans
Similar to conventional loans, it is a type of loan that uses equity as collateral. It is the difference between the value of your house and the total amount of money you have paid. To illustrate, if the appraisal value of your house is $300,000 and your mortgage balance is $200,000, your equity is $100,000. Equity is inversely proportional with your mortgage balance; which means that as your equity goes higher, your mortgage balance decreases.

With home equity loans, the lender gives the complete amount of loan which will be paid back by the borrower in an installment basis. In most cases, it comes with a fixed interest rate.

Some of the many benefits of home equity loans include longer terms which could reach up to 15 years, it comes with a fixed rate so there is no guessing game, and you can borrow the full amount of the equity. People choose it to pay for college education, home improvement or to purchase any consumer goods.

HELOC
Unlike the home equity loan, the HELOC or home equity line of credit doesn’t involve a one-time release of the applied loan. It is basically like a credit card process; a line of credit. This means that if you don’t spend a dime, you won’t have to pay anything.

Some of the benefits of HELOC include adjustable rate, flexible terms of payment, and once the total amount of loan owed is repaid, and you will be able to borrow it again. Most people apply for HELOC to support emergency funds. As the money is available for withdrawal, it can somehow add financial security as need arises.

Bridge Loans
If you are planning to sell your house and you need cash to make improvements for your house before selling it, then you will be interested in availing bridge loans. So this type of loan is most used by typical home sellers.

Some of the features of bridge loans include having competitive loan costs which could reach up to 80% of the total market value, and payments can be settled after 3 or 4 months after release.

These loans can be helpful at times when you are in great need of money. However, take note that the risk of losing your valuable asset is at risk hence before considering to apply for any loan, try to find other resources which will put you at less risk or no risk at all.

Kelly

Tim Gorman asked:




Home Equity Loans

Unlike your first mortgage, you are already in the home, and usually time is not such a major factor. You can close the loan at your own leisure, and take your time researching the different options available to you. A mortgage lender will have a range of loans to suit you. Some homeowners opt to refinance an existing mortgage and use the cash obtained at closing to reduce debts.

Essentially, a home equity loan is a ‘second mortgage’ – a loan secured by your property. If you don’t make good on your payments, the lending company or bank can force the sale of your house to recover their money.

The money is paid back through an increased mortgage payment. Plus, it is an online application, not a paper application that has to be picked up and then turned back in to the bank or mortgage company. Search for quotes from top local mortgage companies based on your needs and choose the best broker to help you through the loan application process. Mortgage calculators help borrowers understand monthly payments and let you compare rates between multiple mortgage products nationwide.

Terms, rates, and fees are subject to change without notice, prior to closing your fixed-rate conversion. Certain restrictions and documentation requirements may apply.

Understanding the difference between home equity loans and home equity line of credit …

Line of Credit

And unlike a home equity loan, with a line of credit you pay interest only when you use your funds. You’re drawing on a home equity line of credit on which the interest meter is ticking, while at the same time the value of your emergency fund has fallen. No need to panic, of course. But because interest rates change constantly, what may have seemed like a good rate when you first purchased your home may be much higher than today’s rates. If you choose to refinance to take advantage of the new rates, you will have to take out a new mortgage with a lower rate or more favorable terms, and use it to pay off your old loan.

Interest is the largest single cost associated with most equity loans, but it is not the only expense borrowers face. Taking out a home-equity loan or a home-equity line of credit imposes the same fees as a mortgage . Interest rates for loans differ, so it pays to check with several lenders for the lowest rate. Compare the annual percentage rate (APR), which indicates the cost of credit on a yearly basis. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates.

Interest rates on such loans are usually adjustable rather than fixed and lower than standard second mortgages or credit cards. Interest on both a home equity loan and line of credit may be deductible (consult your tax advisor about your personal situation). Interest rates, fees, repayment conditions, loan amount, and additional costs such as points can all vary. For example, a lender may charge an annual fee for using your home equity line of credit or even a larger fee if your credit line is inactive.

Interest rates on home equity loans are generally fixed for the loan period. On the other hand, the home equity line of credit provides more flexible terms of use. Interest paid on a home equity line of credit is normally tax deductible. Interest rates lately are near record lows. If you bought your home a few years ago you may well be able to refinance at a lower rate.

Travis

Derek Farley asked:




A home equity loan is a loan that is secured by the equity of the borrower’s home. Because the borrower’s home is used as security, the lender will usually offer an interest rate that is lower than it would be for an unsecured loan. The most common reasons for getting a home equity loan are paying for home improvements, paying off other debts that have a higher rate of interest, and paying for other expensive items such as a college education or medical bills.

A borrower should only seek a home equity loan if they are sure that they can repay it. If the borrower defaults then the lender could foreclose on the borrower’s home and sell it to recover their losses. A borrower must have equity in their home before applying. If the borrower’s home is worth less than the balance on their current mortgage(s) then there is no equity to borrow against.

There are two types of home equity loans – a closed end, and a line of credit. A closed end home equity loan is a lump sum that is repaid in monthly payments over five or ten years, and usually has a fixed interest rate. If the rate is fixed then it is easy to create a loan amortization schedule that shows the balance remaining on the loan after each payment. Variable rates are uncommon for this type of loan because the payments are fixed, so a change in the interest rate might mean that the payments are no longer enough to cover the interest expense. This would lead to a negative amortization, where the unpaid interest is added to the balance.

A home equity line of credit works like a giant credit card, except that there are minimum withdrawal amounts as well as fees for each withdrawal. The interest rate on this type is usually variable. Therefore, the monthly payment amount will change depending on the current interest rate and the current loan balance.

Currently, home equity loans are difficult to get unless the borrower has excellent credit and a lot of equity in their home. This is because the home equity loan will be in second position behind the first mortgage, which makes it difficult for a lender to recover any money if the borrower defaults. However, it is much easier to get if the borrower does not have a first mortgage because the equity loan would then be in first position. In that situation a borrower may find it easier to get than a traditional mortgage.

There is also a tax advantage to getting a home equity loan. The interest is usually tax deductible if the borrower’s primary residence is the home offered as security. The borrower should check the tax code or ask a tax professional for advice if they want to take advantage of this tax deduction.

Hazel

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

Peter Taylor asked:




For a borrower with bad credit arranging finances is an arduous task. This is mainly due to the weakened financial condition and the negative credit report which denies the borrower from availing any financial assistance. However the equation altogether changes if the borrower is ready to pledge any asset particularly home as collateral. By doing so, borrower can not only access finances, along with it the rate of interest levied are very much competitive. With the inception of bad credit home equity loans, borrower can easily execute their various demands without worrying about their credit status.

These loans are collateral based loans and for these loans, the equity value present in the home acts as collateral. Home equity actually implies the present market value of the home minus any outstanding debts taken against it in the past. The loan amount approved will be based on the present market value. However some of the lenders also look for borrower’s monthly income, repayment ability etc while approving the loans.

The main benefit of availing the loans lies in the fact that these loans parody a bigger amount towards the borrower at very competitive interest rates. This is largely due to the collateral attached against the borrowed amount Moreover; these loans are laced with flexible repayment schedules. With these loans borrower can fulfill any personal or business needs without any hassles.

These loans are offered to borrower in two options which are: – standard home equity loans and HELOC that mean home equity line of credit. The standard form of home equity loans offers a bigger amount and is beneficial to meet large financial requirements. ON the other HELOC option, borrower can access finances in installments over a fixed period of time.

It is always recommended to look for viable option while availing the loans. This can be done by applying online which assists the borrower to compare the quotes of various lenders. This results in selecting a lender offering the loan at real cheap rates.

Bad credit home equity loans enables a borrower to use the market of his home for his home. It definitely helps as it assists as the borrower can fulfill all his needs.

Philip