home equity loans

A home equity loan is a loan that uses your home as collateral. Your home equity is the part of your home that you actually own and this is the guarantee for your loan.

Your home equity is calculated by taking the current value of your home and subtracting your mortgage. For example, if your home is worth $150, 000 and you have a $100,000 mortgage, you have $50,000 of equity in your home. A home equity loan allows you to borrow money using your equity of $50,000 as security for the loan.

A home equity loan, often called a second mortgage, reduces your equity or ownership in your home. Since your home guarantees your loan, if you default on the payments, you can lose your home.

There are two basic types of home equity loans: the standard home equity loan and a home equity line of credit. Another way of borrowing against home equity is cash-out refinancing.

The Standard Home Equity Loan
A standard home equity loan, (also called a term loan, a closed-end loan or a second mortgage installment loan), works like a traditional loan. You receive a lump sum payment at a fixed interest rate and you pay the money back in monthly payments over the life of the loan. Since the interest rate on the loan is fixed, your monthly payments will also be fixed.

An example of this is a home equity loan for $30,000 with an interest rate of 7.5% where you pay the money back in monthly payments of $356.11 over the 10 year life of the loan.

Home Equity Line of Credit
A home equity line of credit works like any other line of credit. You are granted an amount you can borrow and you draw money from the account as you need it. You pay interest on only the amount actually borrowed and the interest rate is variable over the life of the loan. While most home equity lines of credit have a variable interest rate, a fixed interest rate can sometimes be negotiated. A home equity line of credit is 'revolving' meaning that you can borrow money, pay off the borrowed money and then re-borrow that money. The money in a home equity line of credit is accessed using specially issued checks or credit cards

Here is an example of a home equity line of credit: You are given a $20,000 home equity line of credit. You borrow $10,000 dollars and are charged a 5% interest rate. The interest rate for the home equity line of credit is not fixed but varies with changes in interest rates. If you pay back $5,000 towards the principal, you still have $15,000 in your line of credit that you can borrow against as needed.

Cash-out Refinancing
While cash out refinancing is not a type of home equity loan, it does allow you to borrow against the equity in your home. In cash out refinancing you take out a new mortgage that is greater than what you owe on your current mortgage - you pay off your current mortgage and use the difference as a home equity loan.

Here is an example of cash out refinancing. Your home is valued at $150,000. Your mortgage is $100,000 and you have $50,000 worth of equity in your home. When you bought your home, you got the going mortgage rate which was 9%. Interest rates have since come down and you decide to take advantage of the lower rates and also borrow $20,000 from your equity for a home improvement project. You take out a new loan for the $120,000 at 6% - you use $100, 000 of that to pay your old mortgage and $20,000 for your home improvement project. You now have a $120,000 mortgage at 6% where as you previously had a $100,000 mortgage at 9%. The difference of $20,000 is the way in which cash out refinancing replaces a home equity loan.

Cash out refinancing typically has a lower interest rate than a home equity loan but closing costs associated with cash out refinancing are higher than closing costs associated with a home equity loan.

Home equity lenders may borrow from traditional equity in your house until it has reached a loan-to-value (LTV) ratio of 80%. The loan is the total money you have in your household divided by the value of your home.

If your house is worth $ 100,000 and you have a $ 60,000 mortgage, the LTV is 60%. If you then a loan for the house $ 20,000, your LTV is 80%. Lenders usually possible combined value of your first mortgage and the loan of his house to 80% of the value of the house, but the lenders greater LTV - some lenders will LTVs between 80% and 90% and some lenders go LTV as high as 125%. There is a catch to this - higher LTV loans more expensive, because they pose a greater risk to the lender.

There are different terms of home loans that can increase your loan costs - you should be aware of these conditions, sometimes avoiding them, and always negotiate the best deal possible. Terms you should know: a pre-payment penalties, credit insurance, and the increase of interest on late payments.

Even large, reputable lenders often nonverbal noted that some of these conditions in your loan offer. You should always have the loan documents in their entirety and questions about these terms.


Pre-payment penalty
A pre-payment penalty is a fine paid to the lender if you pay a home loan early. A pre-payment penalty clause in a home loan is very expensive and a fine of 10% of the amount of the loan is not unusual. This means that a loan of $ 50,000, you pay $ 5000 if you pay the loan early.

Two situations that result in a "home loan is the beginning of the sale of your home for whatever reason or the refinancing of the loan. If you think there is even a possibility that you will sell your home for your credit expires, you must consider removing the penalty for pre-paid portion of your loan. A pre-payment penalty may be forced to maintain a high rate of home loan by taking other options, such as refinancing, even more expensive.

If you ask the lender for the prepayment penalty provision in the loan, the lender in May to raise the interest rate or points at closing. An increase of points paid is often a better option than an increase in interest rates. Remember that items paid a flat rate, while a rise in interest rates and often have a greater impact on the cost of the loan. When presented with the options available to you to stop payments to penalty, some basic calculations will tell you what the best option. A pre-payment penalty can be very expensive - if you think there is a chance that you pay your loan, it's probably better for this condition removed.

Credits
Credit insurance on a home loan is always optional - ask if your loan includes insurance. Credit, such things as credit life insurance broker, disability insurance and unemployment insurance. Credit life insurance, an aspect of credit, pay your home loan if you die.

If you think you need credit, the lender is probably not the best place to do so. Compare with insurers and alternatives such as life insurance - life insurance is usually a cheaper alternative to credit life insurance.

If you decide to obtain credit insurance on your loan, ask whether the full amount of the loan is covered by credit insurance. The financing of credit insurance, which is called "single premium credit insurance" means that credit insurance more expensive because they are paying interest above the insurance.

Credit insurance can be canceled and refunded in full within a certain time if you have already accepted as part of a home loan. Contact your state office of consumer protection for more information about the cancellation of credit insurance.

Increased interest in the event of default
A loan may have a provision for an increase in interest as you a payment or late payment. Rising interest rates will apply for the remainder of the term of the loan. This may reflect very expensive for some reason you miss a loan payment.

Try to negotiate this provision of the loan agreement. You should be able to find a lender that is not necessary, but if forced to do so, make sure you understand exactly what triggers this rate increase and the impact on their loan payments.

Although most home loan lenders are reputable institutions operating within the law, you do not protect against abuse lending practices of some unscrupulous lenders. Homeowners - especially the elderly, minorities and people with low incomes or poor credit - should be careful when borrowing money based on your equity. This is because lenders specifically interested in such borrowers.

The lender has a large number of tricks and dishonest practices. Avoid any lender who:

       * He tells you that you need, to falsify information on loan application. For example, the lender tells you that your loan is primarily for business purposes as it is not.
       * In the application for a loan or a request for more money than you need.
       * That the pressure to the monthly payments can not be done.
       * Is not required loan disclosures or tells you not to read them.
       * Wrong type of credit you receive. For example, to a one-time loan a line of credit.
       * Promise a set of terms as they apply, and gives you a different set of terms to sign - no legitimate explanation for the change.
       * Tells you to sign blank forms - the lender says they fill it later.
       * Says you can not make copies of the documents he signed.


You should not be charged high interest rates or rates. In general, closing costs 5% of the loan amount or less and your interest rate must be less than 4% to 6% above the prime rate. If you think you are overloaded, you must compare with more than one lender to ensure that you are the victim of an unscrupulous lender.

Here are some things you never do. Never accept lender recommendations for improvements in the house of the contractors. Never let your lender directly to pay a contractor for home improvements. Find your lender by actively looking for them and never let your lender, as a door-to-door salesman. Never write your home for all, without first consulting a lawyer. Never allow the creditor or another person on the pressure throughout the home loan process. Always read the entire document loan and never sign documents with blank spaces in total.

Money that is borrowed from a home or a home loan and credit remains unpaid at the end of the term of the loan is a balloon payment. This balloon payment is a large sum of money due if a home loan expires. A balloon payment is a risk and should be avoided.

Home equity, both credit and home equity loan can result in a balloon payment.

Making a house credit and removing the limit of $ 20,000. Just for interest payments for the life of the plant and then be forced to $ 20,000.

In a home loan, your lender may lower interest rates if you agree with a balloon payment at the end of the term of the loan. The lender may reduced rate because the interest paid on the large balloon unpaid balance will be recovered many dollars to the lender. The lender also benefits because, without the lowest interest rate to reduce your monthly payments, you can not afford the loan. The lower monthly payments that the loans affordable for you - you simple, manageable, but the payments at the end of the term of the loan that face the development of a large sum of money.

A lump sum balloon payment can only be paid for the development of a large sum of money, the refinancing of the balloon, or you have a loan, or through the sale of your home.

We will be options.

If you have a home loan, this means that you need cash. In most situations it is very unlikely that a few years away in any way "to" many thousands of dollars to pay for your balloon payment.

Refinancing your home loan or a loan is both risky and costly. You can not predict what the rate will be for the new loan, because for many years. Refinance the balloon payment means that payment of interest on the amount over the life of the loans balloon and can cost more.

Forced to sell your home sometime in the future is very risky if you do not know what your home is worth. If the housing market changes its favor and against his house fell in value, but are forced to sell, you could lose thousands on his house and could not even enough money from the sale to make your balloon payment.

If you need a lump sum, this may be a sign that you can not pay the loan. Ask your lender if the loan is offered a balloon payment or if you can make. A balloon payment is a choice of risk should be avoided.

If a house is worth $ 100,000 and a $ 70,000 first mortgage and a $ 30,000 home loan, the loan is 100%. This means that for every dollar that the home is worth, a dollar is taken against it.

Lenders typically allows 80% of home loans, but lenders go as high as 125% LTV. A high LTV loan is a loan with an LTV of 100% or more. High LTV loans should be avoided because they are expensive and the risk of the tax benefits.

If your home loan increases of more than 100% LTV, this is no longer a home loan. A home loan is a loan that is secured by your house - if you top a 100% LTV, no house worth enough for the amount you want to borrow. The unsecured portion of the loan a high degree of risk to the lender and the risks of you in the form of a loan more expensive.

A high LTV loans directly to you also a danger. As for the $ 100,000 house with a $ 70,000 mortgage. To say that instead of home equity loan is $ 50,000 - the increase in total loans to $ 120,000 for a 120% LTV. If the house is sold, the proceeds of the sale will be $ 100,000 and less expensive real estate prices - not including the $ 120,000 that was owed.

To more than 100% LTV loan part of their house above the value of your home is not deductible, with some exceptions. Take the example of the $ 100,000 house with a mortgage $ 70,000 and $ 50,000 home loan. Only the interest paid on the first € 30,000 of your home loan is tax deductible and interest of € 20,000 over the $ 100,000 price of the house is not. Exceptions to the total home loan amount that tax deductible if the loan was used for home improvements or buy another house.

Here is an example of how an increase in LTV increases the overall risks and costs money. If you decide to access money from the refinancing and home equity to 80% LTV, your lender should you pay for private mortgage insurance protects the lender if you default on your loan.

Not exceed the value of your home when the loan against - is expensive and risky.