Home Equity Loan » Credit Card Debt

The Use of Home Equity Loans – Wise or Not Wise?

admin — Wed, 30 Dec 2009 19:43:56 +0000

Over the past few years many Americans have established lines of credit secured by the equity in their homes or have borrowed a lum sum amount secured by their home. For marginal borrowers this can turn out to be highly risky as it exposes these families to the loss of their homes.
Lenders tend to quickly change colors from friend to foe in times of financial crisis and will “take it away if you can’t pay”.
Prior to mortgaging or refinancing a home you should consider what your families finances would look like if one or more of your family members living in the home lost their job or came down with a serious illness.
How long could you keep the home payments current if there was an unfortunate long term loss of family income?
In spite of the dangers of refinancing or taking out a home equity loan there are times when it may in fact be wise.
Perhaps credit card debt has gotten out of hand. You can get a home equity loan at much lower rates, pay off the credit card debt, and lower your monthly payments, perhaps as much as by 50%.
A word of warning, however. You must not run up your credit card balances once again or you will end up in even worse financial shape than you were to begin with. The second time around trying to carry high credit card debt and a home equity loan payment may be more than painful. It may be financially fatal.
It would be far safer to avoid temptation by cutting up your credit cards and using a debit card instead.
There are other occassions when a home equity loan may be justified. Perhaps you wish to start your own business and are willing and able to take the risk that things may not work out as you plan.
Your home equity will likely be the cheapest source of start up capital that you will find other than going hat in hand to family members. For most families a “friendly” family loan is not recommended as the resulting strife that often takes place if things don’t go as planned causes painful family problems.
Even when all does go well you may get tired of listening to advice from your unofficial business partners.
Perhaps you wish to purchase an existing business, one that should earn you a good income for a long time to come. Again your cheapest source of capital would likely be a home equity loan.
In general, one should consider a home equity loan when the loan proceeds are used to very likely improve ones financial position. This would be a wise use of the loan proceeds.
One should use extreme caution in using a home equity loan to purchase additional consumer goods, say a large expensive flat screen TV set or a new SUV.
The worst example of the use of a home equity loan that I know of was a couple who took out a loan in order to go to the Superbowl. Just think of how much that Superbowl trip will really cost over the years
as interest payments are added in. What a terrible short sighted financial decision.
My advice. Use a home equity loan only to improve your financial position or to raise funds in a true emergency situation. Using a home equity loan to purchase things that will only lose value is a misuse of the loan proceeds that could cost you what is probably your most useful and valuable possession . . . your home sweet home.

Home Equity loan, Cashing in On Your Equity

admin — Wed, 30 Dec 2009 12:58:51 +0000

This is a type of loan under which a property owner uses his residence as collateral security and can get prearranged amount against the property. The loan allows you to use into your home’s built-up equity.
Home equity is the actual difference between the amount your home could be sold for and the amount that you already owe on the mortgage. Assume that the market value of your home is $200,000 and you owe $70,000 on your mortgage, then you have $130,000 equity available on your home. Remember that if you have more than one mortgage taken on your property, then all of them have to be considered for calculating the outstanding dues.
A home-equity loan is a good way to borrow money for two main reasons:
1. The interest rate is one of the lowest loan rates a borrower can get.
2. The interest you pay on the loan is tax-deductible. Thus it is sometimes recommended by many to replace other consumer loans whose interest is not tax-deductible, such as auto loans, credit card debt, and medical debt with the Home Equity Loan.
Caution: If you don’t repay the debt, you can risk losing the home and be forced to move out. Do act with care and make sure you are able to fulfil the repayment terms.
There Are Two Types of Home Equity Loans
1. The standard home equity loan,
2. The home equity line of credit (HELOC’s)
In a standard home equity loan, a pre specified amount of money is loaned in a lump sum for a specified period of time and the same amount of interest is paid every month. It is also called a term loan, a closed-end loan or a second mortgage installment loan.
HELOC works similar to a credit card because it has a revolving balance. A HELOC allows you to borrow up to a certain fixed amount for a specified period of the loan which is set by the lender. During that time period, you can withdraw as much money as you need. As you clear the principal, you can use the credit again, like a credit card.
These loans are repaid in a shorter period of time than the first mortgages. They often have a repayment period of 5 to15 years.
The loan could be either a fixed interest rate or a variable interest rate.
Homeowners often use a home-equity loan for home improvements or debt consolidation or to pay for a new car or to finance their child’s college education.

Financial Advantages Of Home Equity Loans

admin — Wed, 30 Dec 2009 05:38:15 +0000

You may be fortunate enough to already own your dream home. From time to time though you may wish that you have additional funds on hand to help you attain your other dreams and goals. Owning a house may be the answer to your prayers in that it can provide you the basis for borrowing more funds to help you achieve your goals. This can be done simply by making a home equity loan.
But why is this type of loan the best option for getting additional funds? To understand the answer to this question it will help to first learn how it works. Even as you repay the mortgage amount for your house, your home builds up its asset value. This is the “equity” of the home. The equity refers to the difference between the current market value of the home and the outstanding mortgage amount. Even if your home is mortgaged to any financial institution, you are eligible to use the equity of your home as collateral to obtain a large amount of credit.
There are several reasons why you should consider this type of loan as the best option for getting additional funds. Firstly, you can get a loan at a reasonable home equity loan rate even though the interest rate may seem a bit higher than that of your first mortgage. This is because the bank providing the loan would only have second claim on the property in case of default, and this is why the home equity loan providers charge a risk premium. This appears as the additional interest in your loan agreement.
Secondly, this type of loan allows you a significant tax deduction. As opposed to consumer loan interest, home equity loan interest is tax-deductible. For this reason, it makes more financial sense to use home equity loan to consolidate your loan rather than taking out a consumer loan.
You may also have others debts which involve paying off huge amount of interests. It will be much wiser to take out a home equity loan to consolidate these debts, such as credit card debt or debts incurred for expenses like paying off medical bills or paying off for your child’s higher education.
There are a number of financial institutions that offer these loans and to get the best rate, it is a good idea to shop around first. Various kinds of repayment methods are available depending on your financial situation and the type of interest rate you seek, namely variable or fixed rates.
Before taking out a home equity loan make sure that you have all the means at your disposal to repay the loan off as quickly as possible. Do not unnecessarily risk losing your home, unless you feel that this financial burden is surely going to add some long-term value to your life.

When Is The Best Time For A Home Equity Loan?

admin — Sat, 26 Dec 2009 15:53:33 +0000

Americans have been tapping their equity from their homes for decades by taking out home equity loans, equity lines of credit or refinancing. When I was child growing up in the sixties, it was inappropriate for neighbors to talk about a second mortgage, because it meant that you mismanaged your money and the implications were always centered on financial trouble. Times have changed, because over 60% of homes purchased today include a second mortgage in the sales transaction.

If you are a homeowner, you have most likely received solicitations all the time to apply for a home equity loan or refinancing your second mortgage. Home equity loans can be efficient tools for financing home improvements and consolidating credit card debt. Home equity lines of credit can improve cash flow, and provide flexibility for investing. Having an equity line of credit secured to your property, can provide a safety net of cash reserves for family emergencies, or sudden investment opportunities. We suggest getting approved for a home equity loan when you need it least. What we mean by that is, “Don’t wait until you are late on your bills or when a close family member needs your help.” Rarely in life can you plan for investment opportunities, financial obstacles. Remember that mortgage lenders and banks can always get you a loan when you need it. For example, If you are late on your credit card bills and the banks report you late to the credit bureaus, there is a good chance that your credit scores have dropped, and you might not qualify for the home equity loan you need. The same is true, for if you stumble across a worthy investment. Typically investments have a small window of opportunity, and by the time you get approved for a second mortgage, and actually close escrow, the opportunity may be gone.

There are three popular second mortgages that are worth considering.

1. Standard Fixed Rate Second Mortgage- This is your traditional lump sum 2nd loan that features a fixed interest rate and repayment terms that range between 15-30 years. Typically these loans have a 3 year pre-payment penalty that can be bought out in most cases if requested in advance to the loan closing. These 2nd mortgages are recommended for consolidating debt or helping with the down payment of a second home. With these loans each payment you make will go towards paying down the principal and the interest. (125% combined loan to value)

2. Home Equity Line of Credit- This 2nd mortgage is a revolving line of credit similar to a credit card, but interest is deductible to 100% of your homes’ value. The best thing about home equity lines is that you only pay interest when you access cash. If you never touch the line, then you never have a payment due. Home equity lines have variable interest rates and the payments start out low with because, only the interest is due each month during the initial 10-year draw period. This is a very popular short-term finance vehicle for home improvement projects and construction. Once the project is completed people will typically refinance the loan into a fixed rate mortgage loan. We recommend this type of home equity financing for establishing reserves in cases of emergency or investment opportunity. (100% combined loan to value)

3. Home Equity Loan Hybrid- This home equity loan boasts of a fixed interest rate with the ability to make interest only payments for the draw period that is usually 5 or 10 years. These home equity loans have fixed interest for the life of the loan, but they allow you to make a minimum payment of just the interest if you choose. The hybrid equity loans usually require high credit scores, but ask your loan officer about the underwriting guidelines, because the program criteria may change. . (100% combined loan to value)

In summary, don’t wait until the last minute to get approved for a home equity loan. If you really don’t know what you will need, then remember the home equity line will cost you nothing each month if you never use it. Talk to your loan officer, and discuss whether or not you will be doing a full documentation loan, or stated income loan. This will determine whether or not you will need to submit your W2’s and pay-stubs with your loan application. Discuss the interest rates and closing costs for each home equity loan option. Takes a few minutes and review the “good faith estimate” with your loan officer, so you feel good about taking out a loan against your home. Don’t wait for the interest rate to go up any more, and get approved for the second mortgage that gives you flexibility today and access to cash tomorrow when you really need it.

Consolidate Credit Card Debt and Eliminate Debt With a Home Equity Loan

admin — Mon, 21 Dec 2009 11:36:43 +0000

National surveys shows that in average American households carry a credit card balance of approximately $10,000. Many find that it hard to reduce their debts especially credit card debts due to it high financial charge, interest rolled from month to month because most of them just pay the minimum payment each month, causing their debt snowballing and at last they may trap into financial crisis.

While bankruptcy is a tempting option, it is important to explore other alternatives for eliminating debts. Debt settlement with a debt consolidation loan is a better option that bankruptcy. And if you own a home, you are at a much better position to get rid of your debt by consolidating your high interest credit card debt with a home equity loan.

Benefits of a Debt Consolidation Loan

Although a debt consolidation loan is not a magic way to eliminate your debts overnight, but it can help you to reduce your debt faster. As you know, credit card debts and other personal loans are high interest debts. In most cases, your minimum payment barely covers the interest incur by these high interest debts. Hence, you find it difficult to reduce these high interest debt’s balance if your are paying just the minimum payment.

If you lump all your credit cards debts and other personal loans into a consolidation loan, you can take advantage of lower interest rates and lower monthly payments offered by a consolidation loan. This enables you to enjoy debt free with a few years.

Conslidate Debts With Home Equity Loan

There are various ways to obtain debt consolidation loan. You could apply for personal loan or any unsecured loan with reasonable and lower interest rate as compare to your current debt’s interest rate and consolidate your debts into this loan. But, to obtain an unsecured loan, you need to have a good credit score else you loan application most probably will be rejected.

The best way to consolidate your credit card debts or any other high interest debts is using a home equity loan. Of cause, you need to own a home in order to apply for a home equity loan. Home equity is ideal for you to consolidate your credit card debts because the interest is much lower interest rate than credit card and other unsecured loan. And the best part is it normaly have different terms or repayment periods for you to choose from. The longer the repayment terms, the lower the monthly payment is. If your current financial is tight, you could choose the longer repayment term and pay more when you are at better financial situation.

With a home equity loan, your equity works as the collateral. If your home equity is $50,000, you could obtain a loan up to this amount. You could use this home equity loan to clear up all your credit card balances plus other loans; and you just need to focus on making a single monthly payment to your home equity loan.

Some Caution On Using Home Equity Loan To Consolidate Your Debts

Although consolidate all your credit card debts with a home equity loan is an ideal way to settle your high interest rate outstanding debt. You should use the fund wise, borrow just what need to clear your consolidated debts and avoid accumulating new debts while working on clearing your home equity loan. Failure to repay a home equity loan will result in losing your home.

In Summary

If you intend to pay off your debts, consolidating all your debts and pay them off with a home equity loan is a good option. There are tax advantages with a home equity loan and you could also take the advantages of lower interest rates and lower monthly payments offered by a home equity loan.