What are home equity loans
Home equity loan as is apparent from the name itself is when you avail a loan using the equity in your home as a collateral. Home equity is the difference in the fair market value of your home and the amount owed on the property. For as long as the home equity loan lasts, the value in the property vests with the lender. You cannot borrow any more on the basis of your home. Home equity loans are popular among people going back to college, renovating their homes or paying hospital bills. Home equity loans are more common on homes already borrowed against, though this need not necessarily be the case. For instance, you brought a new home but are unable to pay the monthly installments, in such cases you can borrow against your already mortgaged home.
As is with most other loans, what counts is a respectable credit record and also appropriate LTV or reasonable loan-to-value. Loan to value is the percentage derived by dividing the total value of the property by the amount of proposed load. Another important factor is the combined loan-to-value ratio. To put is as simply as possible, a combined loan-to-value ratio is addition of any existing loans on the property to the new loan. For example, a property estimated at $200,000 with a single mortgage of $100,000 has an loan-to-value of 50%. Another property valued at $200,000 with a first mortgage of $100,000 and a second mortgage of $50,000 has an aggregate mortgage balance of $150,000.
Since both loan to value and combined loan-to-value ratios are referred to second mortgages since they are secured by the mortgaged property. The duration of home equity loans are traditionally smaller than the original loan. Under home equity loans the borrower receives a predetermined amount and is prevented from borrowing further. The maximum amount of money that can be borrowed depends on a number of factors including your pay check, credit history, income, and the appraised value of the property. It is not unheard of to be able to borrow up to 100% of the appraised value of the home, after accounting for the lien of course. It all depends on the state you happen to be resident in. Texas laws prevent borrowing beyond three fourths of your equity.
Closed-end home equity loans normally carry a fixed rate and have a life of around fifteen years. Some equity loans allow you to prepay the loan, which means that as the end of loan period approaches you will be compelled to shell out much higher installments. So it is advisable to heed the basic tenet every borrower must know; pay more than the minimum amount. Open ended or home equity line of credit allows you to decide the time and frequency of borrowing against your home equity; with the lender of course setting the maximum you can borrow based on rules similar to closed-end home equity loans. Same as in the case of closed-end home equity loans, in Open ended or home equity line of credit allows you to borrow up to the entire value of your home after accounting for any existing liens. But unlike the former type, this line of credit has a life of thirty years. The interest rate charged is a percentage of the prime lending rate plus a little extra.
Some of the additional expenses you have to bear to avail of home equity loans are; commissions, appraisal charges, stamp duty to name some of the more important. You can save on appraisal charges if you have your own licensed surveyor to evaluate your property. There may also be some hidden charges, so it is best that you go through the agreement with a fine toothed comb.
Most loans will have fees of some sort, so make sure you read and ask several questions about the fees that are charged.
Advantages of a Home Equity Loan
The best thing about a Home equity loan is that it is relatively easy to obtain when compared to what we need to go through to get a unsecured personal loan. The reason for this being that the lender knows that his investment is safe with you. Also you are able to borrow nearly as much as the value of your property. Home equity loan is a deductible expense, which is a major plus point
Also a home equity loan gives you an opportunity to increase the value of your home even further by investing in it.
However, there are two sides to everything. The dangerous thing about home equity loans is that if by any chance you are unable to repay the loan, you will be homeless. So it is necessary to think twice before considering this option. You should opt for this type of loan only when you are confident about your repaying ability and the need is genuine not frivolous.
As a rule, this loan is recommended only for people with a healthy monthly income or who propose to dispose of the property after renovating and repay the loan with the profit. One thing should be understood very clearly, it is highly dangerous to take out a home equity loan to repay existing debts. It stands to reason that if you are unable to repay one loan, you will not be able to repay the new one either.
The least wise thing to spend a home equity loan on is to pay off debt that you already have. If you cannot pay those bills, you may not be able to pay off this new loan either.
So finally, when should you take a home equity loan When you can use the loan to add more value to your home so that selling it can be a healthy proposition. Or another reason could be that you use the loan amount to acquire something of value, something that serves as an investment. So that in case of any eventuality you can sell it or use it to repay your loans.
On the one hand home equity loans are one of the easiest to obtain and on the other the repercussions could be very serious if anything goes awry in your repayment schedule. Being deprived of your home is one of the worst experiences that anyone can face, but with a little planning and discipline, there is no reason why you should not make your dreams come true.
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