Title:
Is a Home Equity
Loan Right For You?
Word Count:
836
Summary:
Home equity loans
are a quick and easy way to tap into the equity you have saved in your
home. Savvy homeowners can save a lot of
money by shopping from a variety of lenders; however, you need to understand
the risks associated with home equity loans and consider alternatives such as a
second mortgage before diving in.
Keywords:
mortgage,
refinance, equity, loan
Article Body:
Home equity loans
are an extremely popular source of credit.
Lenders offer dozens of varieties of loans making it very easy to tap
the equity in your home. If you browse
the marketplace online, you will find most of these loans come with variable
interest rates. Some loans are marketed
with very low introductory interest rate.
There are not many home equity lines that come with fixed interest
rates. Many lenders charge upfront fees
and large amounts at closing. Some
equity loans charge annual fees and may have a large balloon payment due at the
end of the loan. Equity loans that do
not carry balloon payments typically come with much higher monthly
payments.
As a homeowner you need to shop around for the best home equity loan that is
right for you. The challenge is finding
a lender that will match your needs for the best interest rate, fees, and
terms. Fortunately, the marketplace is
extremely competitive, and a shrewd shopper can find excellent deals. To do this you need to contact as many
lenders as possible. Compare offers not
just based on interest rates, but compare the fees and terms as well. Make sure you read and understand all the
fine print contained in your loan contract.
Don’t be afraid to ask questions or haggle over terms and
stipulations. Mortgage lenders need your
business more than you need theirs.
Demand more from your mortgage lender and you’ll be amazed how far it
will get you.
Before shopping for a home equity loan there are several questions you need to
have answers for.
First, is a home equity line of credit right for you?
If you are in a situation where you have to borrow money in a hurry, home
equity lines are a great source of credit.
Home equity lines of credit offer easy access to your home equity and
even tax advantages you won’t find with other loans. The downside of tapping the equity in your
home is that you are using you home as collateral on the loan. If the equity loan you choose comes with a
large balloon payment at the end of the loan, you could place your home at risk
if you are unable to make the balloon payment.
If you move and need to sell the home most equity loans require full
payment at the time of sale. Many home
equity lines allow you to write checks against your equity; this ease of access
to your money could lead to spending when you don’t need to. If you are not careful you could piddle away
the equity in your home with frivolous spending.
There are options available to you other than home equity loans. If you take out a second mortgage on your
home you are paid in a lump sum. Second
mortgages usually come with fixed interest rates making them less risky than
home equity loans.
Second, consider how much you really need versus how much you can borrow.
Your home equity lender will evaluate your credit history along with your income
and debt ratio. Depending on the outcome
of this you may be allowed to borrow as much as 85 percent of the value of your
home. Make sure you fully understand the
loan terms and how the loan works.
Interest rates from home equity lines vary widely between lenders. You can save a lot of money by doing your
homework and shopping from a wide variety of equity lenders. Make sure you are comparing the annual
interest rate for the loans. The
interest rates lenders advertise are based on interest paid. To make an accurate comparison compare all
fees, including closing costs, points paid up front, and any annual fees you
must pay. This will allow you to make an
informed decision on a home equity line of credit or a second mortgage
loan. Remember loans with variable
interest rates typically come with a low introductory period. When this period is over your interest rate
and payment amount could increase dramatically.
Taking out a second mortgage with a fixed interest rate could shield you
from surprises in your monthly payment amount.
If you decide on an adjustable rate loan, make sure you understand the periodic
cap. This cap limits the amount your
interest rate can change at once. Look
for loans that come with lifetime caps as this will limit the amount your
interest rate can change over the life of the loan. Ask your lender which index your interest
rate is tied to. Indexes such as the
prime interest rate are used to set your adjustable interest rate amount. Your lender will charge a margin on top of
this index when setting your monthly payment amount. Finally, ask your lender if you have the
option of converting to a fixed interest rate at a later time. If you do your homework up front and shop
around, you can certainly find an excellent home equity or second mortgage for
your financial needs.