The most important word in “home equity loan” is equity. Start with the fair market value of a home, subtract the mortgages (first and second) and any liens against the property, and what you have left is the equity. This equity can be used as collateral to secure cash in the form of a loan or mortgage.
The amount borrowed is based on a percentage of the appraised value of the home. The percentage rate can vary from 75% to 125%. The length of the financing will also vary. The two main types of home equity loans are fixed rate loans and adjustable rate loans.
Fixed rate loan – provides a fixed amount of money at a fixed interest rate, repayable in equal payments over the life of the loan. Fixed rate financing costs more in set-up fees and comes at higher interest than adjustable rate loans. But if homeowners stay put and interest rates go up, they will save money over a comparable adjustable rate loan.
Adjustable rate loan – the interest rate goes up or down according to the index upon which it is based. Adjustable rate loans will have a cap on how high the interest rate can go. Usually called ARMs (Adjustable Rate Mortgages), this type of loan has lower up-front costs and starts at a lower interest rate than fixed rate financing. This means lower initial monthly payments.
Home Equity Line of Credit (or HELOC) loans offer unique options for borrowers. HELOCs are generally adjustable to the prime interest rate, which means if the prime rate goes up or down, then so does your payment. The primary benefit of a HELOC is that as you pay it down, you still have access to your equity (usually through a check or credit card). That equity is always available to you for investments, paying off high interest debt, vacations, or to pay off unexpected bills.
Putting Home Equity to Good Use
According to the Consumer Banker Association, the top ten reasons for getting a home equity loan are:
10. Vacation
9. Medical expenses
8. Business expenses
7. Household expenditures
6. Investment
5. Major purchase
4. Education expenses
3. Automobile purchase
2. Home improvement
1. Debt consolidation
Debt consolidation, the most popular reason people cash out their home equity, is a smart form of financing because of the money it can save. For example, say you owe $15,000 on a credit card that charges 17% interest. If you get a debt consolidation loan at 9% interest and pay it off in five years, you’ll save you over $30,000!
If you’re paying more than 15% interest on anything, you should seriously consider a debt consolidation loan. The right terms could drop your monthly payments by 35%-50%, depending on interest rates, origination costs and tax consequences.
Even for people who have bad credit or who have filed for bankruptcy, a home equity loan is not out of reach. It can be a good way to make a fresh start.
JumpStartMyCredit.com has several different refinance options to serve you. Only by carefully evaluating all of the options can you make an informed decision. Let’s go over several of your mortgage refinance options:
Home Equity Line of Credit (H.E.L.O.C.)
A HELOC is a line of credit on your equity, just like the name implies. The true beauty of a HELOC is that you can use it like a credit card, or a checking account. It is possible to open a line of credit on your home, and not use the entire line right away. By doing this, you have access to thousands of dollars with very short notice. Some people use HELOCs for investments, to pay unexpected bills, to consolidate high interest debts, to pay off medical bills or legal fees, or to go on vacation.
With a HELOC, lenders typically give the borrower(s) a check book and/or a credit card that will take money directly from the unused credit line.
Debt Consolidation Mortgage
Debt consolidation mortgages are set up for the sole purpose of combining high interest and high payment debt into one low monthly payment at a better interest rate. The equity on your home serves as the loan collateral, and the payment and interest rate are usually fixed.
Mortgage Refinance
With mortgage rates still at historic lows, it is easy to see why borrowers are locking in low rates now, while they still can.
Most refinance mortgage loans serve one or more of these three purposes: 1. Cash Out, 2. Lower Payment, 3. Lower Rate. It is often possible to pull a lot of cash out at closing, while locking in a lower rate then you have now, and lower your monthly mortgage payment.
Do not wait for mortgage rates to go back up. Apply today with Jump Start My Credit and start saving money. Get up to four loan offers by filing out one easy application. After that, all you have to do is pick the best loan.
Bad Credit
JumpStartMyCredit.com works with lenders that help with all types of credit. If you are scared about being turned down, don’t be. If there is a way to get your loan approved right now, our lenders will find it. If your credit seems beyond help right now, you might also consider using the Credit Repair and Debt Settlement services offered here at JumpStartMyCredit.com.
There are several options, and a few things to consider, when deciding which right for you.
If the interest rate on your mortgage is higher than current rates, it may make sense to refinance and take a lump sum of cash from your home’s equity. You’ll simply refinance your mortgage to a larger loan amount and take the difference in cash.
Another option is a home equity loan. A home equity loan is essentially a second loan that you take out in addition to your first mortgage. Commonly referred to as a “second mortgage,” a home equity loan allows you to tap into your home equity to get cash without refinancing your first mortgage. A home equity loan is a good choice if you’d like your cash in a lump sum and you already have a great rate on your first mortgage.
A home equity line of credit (HELOC), your third option, is very similar to a credit card except that it uses the equity in your home as the revolving line of credit. You make monthly payments only if and when use the money. But, unlike credit cards, the interest is usually tax deductible*(Check with your Accountant). With a HELOC, you can get a lump sum at closing, or elect to take only part of your money and draw on the rest when you need it.
Unlike a home equity loan or a refinance, you can get a home equity line of credit in as little as ten days. A HELOC is a good choice if you’d like ready access to your home equity when you might need it.
Confusion among homeowners due to ineffective and complex mortgage disclosures resulted in a study by the Federal Trade Commission in which 80% of mortgage customers were given disclosure forms for an abstract loan. The message is loud and clear there is a need for easy to read and comprehensive mortgage terminology.
The study described in an article from Los Angeles Times on June 14, 2006 by Kathy M. Kristof shows how most borrowers are perplexed by the complexity of mortgages due to an unsuccessful explaining of costs and the risks of home loans as well as a lack in the understanding of the terminology.
In a press release issued May 7, 2007 by the U.S. Department of Justice and the Federal Trade Commission (FTC) the purpose of the joint report, “Competition in the Real Estate Brokerage Industry,” is to inform consumers and others involved in the industry about important competition issues involving residential real estate, including the impact of the Internet, the competitive structure of the real estate brokerage industry, and obstacles to a more competitive environment.
In a complicated world that demands constant attention and offers an array of choices, the fact is, consumers prefer less choices and simplicity. A number of details lead to complexity and this can overwhelm consumers. It is all too common; the more choices we have the more we struggle to choose.
Have you ever heard of anybody complaining about the bundling of gas prices? What you do not see is that the local state and federal government each gets one third or 33% of money in taxes, while the oil companies get ten percent and gas stations get five percent. But no one seems to care where the money goes.
For the same reason, an itemization of all the details concerning mortgages can deter consumers from understanding mortgage’s disclosures. Perhaps, a bigger problem is the deceptive tactics often used by the mortgage lenders to sell home loans to consumers as shown in the study.
So, the issue here is not just the confusion of terms but also deception. New companies will resolve the confusion, including services where real estate agents and lending professionals can facilitate approval and processing of loans for customers faster.
Consumers should look for companies like this that provide a clear diagram of the program class loan amount, total down payment and closing costs, monthly payments, loan rate, APR, commission, and agent yield. Borrowers can identify the loan amount, the upfront cost of the loan, penalty amounts, the annual percentage rate, the amount of cash due at closing or the monthly payment, and if the payment included charges for property taxes and insurance.
