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What is a Home Equity Loan?

We provide you with the facts you need to shop home equity loan options.  Home equity loans by definition are loans that use your home as collateral. Your home equity is the part of your home that you actually own and this is the guarantee for your loan.

Your home equity is a calculation made by taking the current value of your home and subtracting your mortgage. For example, if your home is worth $150, 000 and you have a $100,000 mortgage, you can calculate that you have about $50,000 of equity or ltv in your home. A home equity loan allows you to borrow money using your equity of $50,000 as security for the loan.  The same for a home worth $125,000 with a $75,000 mortgage and so on and so forth.

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A home equity loan, often called a second mortgage, reduces your equity or ownership in your home. Since your home guarantees your loan, if you default on the payments, it could result a demand for full payoff or end in bankruptcy and  you can lose your home. Check with different companies to find the most ideal rates and terms for your financial situation.  Lots of major banks are offering Home Equity Loan programs.  You’ll find information with banks such as Wells Fargo, Wachovia, Chase, Paramount and more.  And most times you can get a quote and more info by filling out an online doc.  Find out how by visiting your favorite bank’s website.  You can also get all of your faq questions answered regarding no, poor or bad credit history, defaults on auto loan impact, the difference between traditional and FHA Home Equity Loans, how to consolidate debts, consolidation loans, the lowest rates and terms and percent of interest, fast closing loans, learn the requirements for getting approval for a loan, refinancing, reverse mortgages vs traditional first and second mortgages, stated income versus verification, loan requirements as of today, interest only loans for the refinance or buying of new homes,  talk to real people who are available daily to help with your faqs.  Find lenders across America and states including California ( CA ), Massachusetts ( MA ), Tennessee ( TN ), Pennsylvania ( PA ), New Jersey ( NJ ), Florida (FL ) and more.   Most sites provide helpful tools like mortgage calculators and places to enter your information to get a lead from different lenders.  There are different requirements for different types of housing like mobile homes and modular homes, so be sure to do your homework.

The Standard Home Equity Loan

In a standard home equity loan application, the money is loaned in a lump sum and is to be repaid at a fixed interest rate in monthly payments over the life of the loan.

The term or length of a home equity loan is shorter than your average first mortgage on a home. The term on a home equity loan can be from 3 to 15 years whereas a typical first mortgage runs from 15 to 30 years.

It is best that you take out the shortest term possible that still allows you to comfortably make monthly payments. The reason for this is the mountain of interest you will save. Compare two home equity loans each for $30,000 at 7.5% – one has a term of 10 years and the other has a term of 20 years. If you can pay back the money in 10 years instead of 20, you will save yourself the cost of more than $15,000 in interest – that is more than half of what you are borrowing.

The interest rates on a home equity loan are higher than a mortgage. This is because a home equity company takes on a greater risk comparison than does a mortgage lender. If your house must be sold, the lender of the first mortgage gets paid before the lender of a second mortgage (home equity loan).

With both home equity loans and lines of credit, if the home is sold, you must pay off the loan in full.

Home Equity Lines of Credit

A home equity line of credit works a lot like a credit card that is guaranteed by your home. You have a limit or a maximum amount that you can borrow against as you need it. Your payments depend on the amount of money you use and a variable interest rate.

Home equity lines of credit often offer an introductory interest rate. The introductory rate is a very low interest rate that is offered for a short period at the start of a loan. After the introductory period, your interest rate will be several percentage points higher.

The interest rate you pay on a home equity line of credit is calculated using an underlying index and then adding a margin rate to it. A common index that is used is the prime rate . The margin that you pay is a certain number of percentage points above the index rate. For example, if the current prime rate is 5% and the margin is 1%, you are paying a 6% interest rate on your home equity line of credit.

The interest rate on a home equity line of credit is usually a variable rate although fixed interest rates can be negotiated with some lenders. Some lenders may even allow you to convert from a variable interest rate to a fixed rate during the loan term or convert all or part of your home equity line of credit to a term loan. If this option interests you, ask the lender if this is available and ask about any costs associated with this option.

In a variable rate loan, the way that the interest rate changes is governed by the periodic cap and the lifetime cap. The periodic cap is the limit on interest rate changes at one time. The lifetime cap is the limit on interest rate changes throughout the loan term.

The life span of a home equity line of credit is called a draw period – this is the period of time in which you can access funds. When you have borrowed money from your home equity line of credit, your monthly payments will vary with the variable interest rate and the total borrowed amount referred to as the outstanding balance. You can pay the outstanding balance in full or you can make a minimum payment on the balance. You should be aware that some plans may require that you keep a minimum amount outstanding – ask if your plan does.

If you have an outstanding balance at the end of the draw period, your home equity credit line may require you to pay the outstanding balance in full – this is referred to as a ‘balloon’ payment. You may have the option of repaying the outstanding balance in payments over a fixed period of time. This second option in effect takes the outstanding balance of a home equity line of credit and turns it in to a term loan. You must inquire about what happens to outstanding debt at the end of the life of a home equity line of credit before you sign loan documents to close the deal.

Home equity lines of credit can be structured in different ways. Here are some features that you should be aware of. Home equity lines of credit can require you to take an initial amount out when the credit line is opened . Your credit line may apply a transaction fee each time you use money from it and you may be subject to a minimum or maximum withdrawal amount each time money is used. Some lenders may waive closing costs if you keep the minimum withdrawal amount outstanding for a period of say six months. When the draw period expires, you may or may not be able to renew your credit line.

Continuing costs, also called annual membership or participation fees, are annual fees are charged to maintain the home equity line of credit. Continuing costs are applied whether or not you use your account. Inactivity fees are fees that are charged if the account is inactive over a certain period of time. You may be charged continuing costs and/or inactivity fees.

As with home equity term loans, if you sell your home, you will be required to pay off your home equity line of credit in full.

Pros and Cons of Home Equity Loans

A lower interest rate and tax deductions are the two major advantages home equity loans have over other types of debt.

Since a home equity loan is secured by your home, it poses less risk to a lender than does a non-secured personal loan or credit cards – this lower risk is passed on to you in the form of a lower interest rate.

The Impact of your Equity Home Loan Rate

The second major advantage is that regardless of the way a home equity loan is used, the interest you pay on the first $100,000 you borrow is tax deductible. Credit cards and other types of non-secured loans do not have this tax benefit. This means that if you pay $3,000 in interest on your home equity loan, you will reduce your taxable income by $3,000 at the end of the year. If you use a home equity loan for home improvements or to buy another home, you can deduct the interest paid on the first $1 million that you borrow. The reason for this is that home improvement loans are similar to first mortgages for tax purposes. You should consult a tax advisor about the specific tax benefits available to you.

The biggest drawback of a home equity loan is the fact that your home is on the line and you could lose your home if you default on your payments. When you borrow from your home’s equity you also reduce the equity or ownership you have in your home. This means that you trade ownership or equity in your home for cash that you will use for some some other purpose. In addition to interest you will pay on the loan, there are also costs associated with taking out a home equity loan – these costs are similar to the costs you paid when you bought your home.

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