subject: Fast Home Equity Loan Information [print this page] One should pause for a moment and consider some things before jumping on the idea of a fast home equity loan. The first consideration for a loan should be to understand its purpose. Second consideration is to understand the risks and fees in obtaining another loan. Some information that a mortgage broker might fail to present is the fact that by extracting equity from your home one could face a loss if the home price declines below the loans outstanding.
However, home equity loans do have some advantages. One advantage is the low interest payments when compared to unsecured loans such as credit cards. The interest payments will, however, be higher than a primary mortgage because of the higher risk profile associated with an increase in borrowing. For this reason, it behoves the borrower to shop around for a good rate. Another advantage is that the interest payments are tax deductible.
There are different categories of home equity loans. The basic home equity loan is comparable to a term loan. The interest payments are fixed for a fixed maturity date. The benefit here is that the borrower receives a lump sum payment up front for his or her needs, such as home improvements.
A home equity line of credit is another kind of loan that behaves like a revolver type loan or credit card. Here the equity in the home is used as a line of credit. No interest is charged until there is an actual withdrawal on the line of credit. The type of interest rate is usually a floating rate and there can be extra fees depending the loan structure.
Another type of home equity loan is called the cash out refinancing. Here the borrower ends up with one bigger mortgage instead of two. The borrower takes out a larger loan than the existing mortgage in order to pay off the existing mortgage and keep the difference as the excess equity that has been cashed out. The borrower has many options with regards to loan terms and interest rates.
However, times have changed and the mortgage crisis has forced many banks to become more conservative. For example, they have become more stringent on factors such as loan to value. This is important to the borrower because even if the homeowner has built up a certain amount of equity, he or she will not fully realize that amount unless if they sell the house. Ass I'm sure you know, banks always require some type of cushion.
One item all borrowers should consider is the term of the loan. The longer the term of the loan the larger the aggregate amount of interest payments and cost. Therefore, it is almost always wise to take the lowest maturity term that still fits into one's monthly budget. In determining the monthly payment estimate, one should not assume the current mortgage rate because second mortgages, such as home equity loans, have a higher interest rate.
Finally, there are extra costs to consider when obtaining a home equity loan. These would include closing costs, title search fees, attorney fees, and appraisal charges. Also, one should keep in mind their money needs. If, for example, you are looking to consolidate your debt, then a home equity loan is more appropriate than a home equity line of credit. For funding college tuition expenses, a line of credit would be more appropriate. In all scenarios, it is best to perform at least a rudimentary cost benefit analysis.
