Home Equity Loans loan
What are home equity loans:
A home equity loan is an innovative concept of borrowing money against the equity stake in the home property to meet personal expense like home renovation, purchase of a new car, college and tuition education expenses, medical expenses, etc. Suppose an individual has a house or a property, which he bought in 2000 for $200,000 financed by 30% equity and 70% debt. The
equity amount works out to $60,000 and the debt component is $140,000. During 2000 to 2006 the individual borrower has made repayments to the mortgage financing company. Lets assume that the principal component in the repayment amounts to $30,000.In 2006 the appraised value of the property as per market rates is around $300,000. Thus it works out that the equity value of the house is $190,000 ($300,000-$110,000debt). Thus equity is the difference between he worth of the home and the amount owed to the lender. In the above instance $160,000 is the equity. A home equity loan allows the homeowner to borrow money using the equity as collateral.
Home equity loans:
Collateral is the property that the borrower keeps with the lender as guarantee that he will replay the debt. Incase the borrower is unable to repay the debt; the lender has recourse to the mortgaged collateral and can sell it to get his money back. Thus the borrower may lose his home if he is unable to repay the borrowed amounts in stipulated time period.
Home equity loans are available at very low processing costs. A home equity loan is also beneficial for tax purposes. The interest payments made against the loan are usually deductible from the total income off the borrower.
Home equity loans are basically of two types-Home Equity loans or Home Equity Lines of Credit (HELOC). Both are secured against the property and hence are called second mortgages because the property is first mortgaged as collateral against the original or primary loan.
Loans:
The normal home loans borrowed out rightly to purchase a property differ from home equity loans. The loan repayment period and the interest rates differ on these different types of loans. Home loans are normally repayable over a longer period of time extending up to 30 years. However in case of home equity loans repayment is for a much shorter period in a range of 5-10 years. Home equity loans can broadly be classified in to closed ended and open-ended equity loans.
Closed ended home equity loan is one in which the borrower borrows a lump sum amount or one time disbursement to meet a big expenditure like down payment on a car, debt consolidation against the equity in his home or the property. The borrower borrows amount at a fixed rate of interest for a fixed period. The repayment is done in fixed installments with a balloon payment at the end of the term period. The maximum amount that can be borrowed depends on the home appraisal, credit history and the forecasted income of the borrower among other variable factors. Some lenders lend up to 100% or even more of the appraised value depending on specific market strategies and competition.
An open-ended equity loan is also called Home Equity Line of Credit or revolving credit. Such a line of credit is suitable for those borrowers who have periodic ongoing expenses like home remodeling or tuition costs over a period of time. It is a variable interest rate loan and the line of credit is open for a long period of time. The interest rates keep on fluctuating depending on the benchmark interest rate called the prime rate and a suitable margin depending on factors like credit history, income sources, appraised value of the home, etc. The line of credit can extend up to as long as 30 years. Also the periodic repayment may be as low as only the interest due on such loans.
The changing world:
In todays mortgage market various innovative home equity loan options are available which offer blend of tradition fixed rate and variable line of credit. Such a product is suitable for those borrowers who have one big current expenditure and ongoing recurring expenses in future. The initial lending is done at a fixed rate and a line of credit is opened for a certain period wherein the borrower can borrow money at variable interest rates. In this type of loans, the borrower faces less market risk due to the fluctuations in interest rate. Wells Fargo is one such popular and well-known mortgage-financing lender in United States of America, which offers all the three types of products-Home Equity loan, Line of Credit and also Smart fit Home Equity loan, which is a combination of variable and fixed rate. Since May 2006 average interest rates on closed ended home equity loans has been lower than open lines of credit.
The Fed has continuously hiked interest rates over the last 17 quarters thereby increasing the prime rates from 4% to 8.25%. This hike in prime lending rates has affected the variable interest borrowers or people who have opted for home equity lines of credit rather than the fixed home equity loan borrower. Any pause in interest rates hikes as forecasted by several economists may again bring back the luster in variable lines of credit home equity loan.
A home equity loan is also a smart tool to renovate the house and make it available for sale. The borrower can borrow funds and renovate the house so as to increase the appraised vale and then put the house on sale. Such home equity loans can be used for refurnishing, repainting etc. It is often conceived that an investment in refurnishing kitchen yields more than a dollar-to-dollar returns. Also, investments in increasing the number of bathrooms and bedrooms by slight modifications in your home can increase the number of potential buyers and thereby the appraised value of the house. Such home equity loans intended for renovation of house for ultimate sale should be planned well so as to get a good deal on interest rates as the loan repayment period would be very short with a balloon payment as soon as the house is sold.
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