Home Equity Loans – second mortgage

Jon Arnold asked:




What is a home equity loan? A home equity loan is where you borrow money using the equity in your home as the collateral. Many people use home equity loans for refinancing their home, their kids’ college tuition or unexpected medical bills. Be aware that using a home equity loan will reduce the actual equity of your home.

Your home equity is the value of your property. Your home value will increase as you pay your mortgage or do home improvements that benefit the value of your home.

Collateral is property that you use as a guarantee that you will repay the money. If you do not pay this is where your collateral comes into play. The lender can use your collateral to obtain the money you owe. Using your home as collateral is risky if you do not know one hundred percent that you can pay the loan back because you will lose your home if not.

A home equity loan is like a second mortgage some might say. You can use this money to improve your home furthering its value or pay for other expenses you might have. In order to get this type of loan you will probably have to have great credit history. It is even possible to have your loan interest deducted from your income taxes.

There are two types of home equity loans; closed and open end. Closed end loans means you will receive one lump sum when the loan is closed and will not have the option of borrowing more. The lenders will base the amount you can borrow on things like your credit history, the appraised value of your collateral and your income.

Closed end loans usually have rates that are fixed for up to fifteen years. You can also refinance this type of loan if needed. You want to try and always pay the minimum amount if not more every month.

Open end home equity loans are sometimes called a line of credit. This means you can decide when you want to borrow and how often against the equity of your property. The lender will still set a limit to your credit line. You might be able to borrow up to one hundred percent of the value of your home, however some states are only allowed to loan up to eighty percent of the value.

There are certain loan fees you should be aware of that may apply as well, depending on the laws in your state. These include title fees, stamp duties, closing fees, appraisal fees, originator fees, and surveyor fees.

While you may have to pay all these fees, if you do your research before obtaining this type of loan, you will know if it is worth it. You don’t want to chance losing money or value on your home.

If you are uncertain if a home equity loan is right for you, speak to your financial consultant. Discuss all your concerns and questions so you can both decide what is best for your situation.

Darryl

Alan Lim asked:


Ever feel lost when people talk about subjects like a home equity loan? It certainly does sound something like what you would hear on a business news show. But for every homeowner or someone considering property purchase, home equity is an important concept to grasp. It really isn’t very complicated either. Therefore, piror to understanding a home equity loan, let’s first talk about home equity.

What is home equity?

Equity can simply be understood as the monetary value of something you own after you deduct the amount of outstanding loan you have on it. For example, if your house is worth $200,000 and you owe your finance company $50,000, then the equity of your home would be $150,000. So basically, the more loans you clear on your home the greater equity it will have. A surge in the real estate market and prices of property also helps in adding on to your home equity.

What is a home equity loan?

Now that you have an idea of what a home equity is, let’s get into a home equity loan. Simply put, it is the process of taking a second mortgage on your home. For example, if your have recently bought a house for $200,000 on mortgage, a home equity loan will allow you to secure a second mortgage of 25% of your first mortgage, which would be $25,000 in this case. Depending on the lender, one may even be given as much as 80% of the original mortgage for their second mortgage.

Six key aspects to consider

1. First of all, issue a home equity loan only if you must. It is always better to not have any additional loans than the one you already posses.

2. If you do feel you need to secure a home equity loan, then you will generally need to have a great credit score since this loan is mostly given to those who are considered “qualified borrowers,” i.e. those who have a good track record of paying back on time what they have borrowed.

3. Keep in mind that apart from the credit score, your home itself will also be on the line as collateral with the lender. So defaulting on your loan could result in losing your home.

4. One good advantage of a home equity loan is the fact that the interest rate is generally lower than those of credit cards. So if you do need to borrow money through a credit card for something large, then this would be a less expensive option. But make sure you do a proper comparison of the cost of borrowing money with other options that you might have.

5. The interest you pay on your home equity loan is also tax deductible, which can be a huge benefit when you are cash strapped. But there are limitations to this, so look into it carefully.

6. Shop around. Don’t jump into the first option you see on being issued a home equity loan. Find out how you can get the best interest rate (fixed or adjustable) and read the fine print on your withdrawal limit.



HARVEY