subject: Fast Home Equity Loan Considerations [print this page] There are many things to consider before applying for a fast home equity loan. First and foremost is the purpose of the loan. Secondly, home equity loans are not without risk no matter how many good selling points mortgage brokers throw at you. The reason for this is that equity loans draw from the equity value in your home. So if housing prices drop, which they can, the homeowner is under water financially because he or she will owe more money than the value of the home.
Home equity loans do have some advantages over other types of standard loans. The two main advantages are a lower interest rate expense than other unsecured loans and interest payments are tax deductible. As an equity loan on your home is considered a second home loan, the rate will be higher than a first mortgage loan. The borrower should definitely shop around for the best deal.
Home equity loans also come in different types. A standard home equity loan is similar to a term loan where the interest payments are fixed until the maturity date of the loan. In this type of loan, the borrower receives an upfront lump sum which can be used for any reason, including home improvements.
Another type, the home equity line of credit, is similar to a revolver or credit card. The homeowner essentially uses the equity in their home as a line of credit and interest is owed only on the amount that is borrowed. Interest rates on credit lines are typically floating rate and can have additional fees tied to them.
Lastly, there is something called a cash out refinancing. In this scenario, the homeowner takes out a loan greater than the current mortgage but lower than the market value of the property. The borrower than repays the initial mortgage and assumes this new larger loan as the new mortgage. The extra cash difference is the amount effectively being drawn out of the equity in the home. Here the term and interest rate payments can be variable or fixed.
In the aftermath of the mortgage crisis, lenders have become more conservative or prudent in their practices. Therefore, one concept to understand is the loan to value ratio. The important factor here is that if one has built up say one hundred thousand dollars of equity in the home, the homeowner will not be able to realize the full hundred thousand unless they sell the home. The loan to value ratio limits the amount one can borrow against the equity in their home.
Another thing to consider is the term of the loan. Generally, it is always wise to take the lowest term available that fits one's monthly budget. The reason being, it lowers the overall interest rate expense because the longer it takes to pay the money back, the longer the borrower has to continue to pay interest. You should be aware that interest rates are higher for home equity loans than first mortgages because of the added risk. Therefore, you should not assume the same payment schedule as you currently have with your primary mortgage lender.
Additional costs to consider, aside from closing costs, are title search, attorney fees and appraisal fees. Borrowing money is never free or without risk. Furthermore, one should select the type of home equity loan that fits their needs. Home equity loans are often more suitable for debt consolidation purposes. They work better than a home equity line of credit because the requirement is known at the outset and one can budget in a fixed monthly payment. For fluid situations, such as college tuition costs, a home equity line of credit would be more appropriate. One should always take the time to do some basic cost benefit analysis and make comparison before making a final decision.
