Home equity loans are an extremely popular source of credit.
Lenders offer dozens of varieties of loans making it very easy
to tap the equity in your home. If you browse the marketplace
online, you will find most of these loans come with variable
interest rates. Some loans are marketed with very low
introductory interest rate. There are not many home equity lines
that come with fixed interest rates. Many lenders charge upfront
fees and large amounts at closing. Some equity loans charge
annual fees and may have a large balloon payment due at the end
of the loan. Equity loans that do not carry balloon payments
typically come with much higher monthly payments.
As a homeowner you need to shop around for the best home equity
loan that is right for you. The challenge is finding a lender
that will match your needs for the best interest rate, fees, and
terms. Fortunately, the marketplace is extremely competitive,
and a shrewd shopper can find excellent deals. To do this you
need to contact as many lenders as possible. Compare offers not
just based on interest rates, but compare the fees and terms as
well. Make sure you read and understand all the fine print
contained in your loan contract. Don't be afraid to ask
questions or haggle over terms and stipulations. Mortgage
lenders need your business more than you need theirs. Demand
more from your mortgage lender and you'll be amazed how far it
will get you.
Before shopping for a home equity loan there are several
questions you need to have answers for.
First, is a home equity line of credit right for you?
If you are in a situation where you have to borrow money in a
hurry, home equity lines are a great source of credit. Home
equity lines of credit offer easy access to your home equity and
even tax advantages you won't find with other loans. The
downside of tapping the equity in your home is that you are
using you home as collateral on the loan. If the equity loan you
choose comes with a large balloon payment at the end of the
loan, you could place your home at risk if you are unable to
make the balloon payment. If you move and need to sell the home
most equity loans require full payment at the time of sale. Many
home equity lines allow you to write checks against your equity;
this ease of access to your money could lead to spending when
you don't need to. If you are not careful you could piddle away
the equity in your home with frivolous spending.
There are options available to you other than home equity loans.
If you take out a second mortgage on your home you are paid in a
lump sum. Second mortgages usually come with fixed interest
rates making them less risky than home equity loans.
Second, consider how much you really need versus how much you
Your home equity lender will evaluate your credit history along
with your income and debt ratio. Depending on the outcome of
this you may be allowed to borrow as much as 85 percent of the
value of your home. Make sure you fully understand the loan
terms and how the loan works.
Interest rates from home equity lines vary widely between
lenders. You can save a lot of money by doing your homework and
shopping from a wide variety of equity lenders. Make sure you
are comparing the annual interest rate for the loans. The
interest rates lenders advertise are based on interest paid. To
make an accurate comparison compare all fees, including closing
costs, points paid up front, and any annual fees you must pay.
This will allow you to make an informed decision on a home
equity line of credit or a second mortgage loan. Remember loans
with variable interest rates typically come with a low
introductory period. When this period is over your interest rate
and payment amount could increase dramatically. Taking out a
second mortgage with a fixed interest rate could shield you from
surprises in your monthly payment amount.
If you decide on an adjustable rate loan, make sure you
understand the periodic cap. This cap limits the amount your
interest rate can change at once. Look for loans that come with
lifetime caps as this will limit the amount your interest rate
can change over the life of the loan. Ask your lender which
index your interest rate is tied to. Indexes such as the prime
interest rate are used to set your adjustable interest rate
amount. Your lender will charge a margin on top of this index
when setting your monthly payment amount. Finally, ask your
lender if you have the option of converting to a fixed interest
rate at a later time. If you do your homework up front and shop
around, you can certainly find an excellent home equity or
second mortgage for your financial needs.
About the author:
NoneLouie Latour has twenty years of experience in the mortgage
industry as a mortgage broker. He is the owner of Mortgage Refinance
Advisor, a mortgage resource site devoted to saving homeowners
money with a free guidebook "Five Things You Need to Know Before
Refinancing a Mortgage." http://www.refiadvisor.com
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