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A home equity loan or home equity mortgage is an effective second mortgage on your home, taken out after you have developed some equity in your home. For example, if you purchase a home for $200,000 and you have paid $40,000 over the years against the loan principal and the market value for the home is now $250,000, you now have equity in the home of $90,000. Â Theoretically, you could apply for a $90,000 loan against the equity, but in practice, most lenders prefer to keep the loan at 80% loan to value or, in this case $187,500. Â In this example, a loan for $27,500 could be approved.
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Definitions
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Some of the definitions that you will need to be familiar with include equity, mortgage, interest rate, loan fees, loan type, principal and amortization. Â If you don’t understand the meaning of these words and others insist on an explanation from the loan broker or lender. Â You can also do the research yourself so that you are certain you understand the difference between an ARM and a fixed rate loan and why you should choose one or the other, depending upon your circumstances. There are some very good primer level books and classes on almost any subject you can name out on the internet including that of a home equity loan.
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Terms
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In the case of a home equity mortgage, the word ‘terms’ can mean ‘words’ or it can mean the length of time before the loan is paid off. Â A loan against the equity of your home often will have a longer term than a personal loan. Â You may see terms of 15 years, 20 years, even 30 or 40 year terms on the loan. Â Of course, the longer the term, the more money in interest you will be charged and the larger the percentage of funds you pay are for the privilege of using the money rather than for the money itself.
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Rates
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The home equity loan rates are also called interest rate or interest. Interest rates are usually structured in one of two ways, although there are other types of loans as well. Â The fixed rate loans set an interest rate up front and it remains in effect throughout the term of the loan. Â The adjustable rate mortgage loan has an interest rate that will vary according to a predetermined index or formula. Â For example the rate may be two point above prime rate, adjustable not more than twice every two years. Â These requirements will vary depending upon the economy of the time.
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Advantages and Disadvantages
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A home equity loan or home equity mortgage has the advantage of being a lump sum of money that you can use in any way you see fit–presumably legal. Â It has the disadvantage of increasing your debt loan and increasing the cost of money sometimes significantly. For example taking out was is actually a second mortgage on your home may raise your debt to value level to the point where private mortgage insurance is mandated by many lenders. Â This can add thousands of dollars to the repayment amount over the years.
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Posts Tagged ‘Fixed Rate Loan’
Home Equity Loan – Understanding the Basics of Home Equity Mortgage
December 21st, 2009Home Equity Loan – Understanding the Basics of Home Equity Mortgage
December 21st, 2009A discussion of the nature, benefits and operational methods of a home equity loan in simple, easy to understand language is helpful in deciding whether or not such a home equity mortgage should be acquired. A home equity loan or home equity mortgage is an effective second mortgage on your home, taken out after you have developed some equity in your home. For example, if you purchase a home for $200,000 and you have paid $40,000 over the years against the loan principal and the market value for the home is now $250,000, you now have equity in the home of $90,000. Theoretically, you could apply for a $90,000 loan against the equity, but in practice, most lenders prefer to keep the loan at 80% loan to value or, in this case $187,500. In this example, a loan for $27,500 could be approved. Definitions Some of the definitions that you will need to be familiar with include equity, mortgage, interest rate, loan fees, loan type, principal and amortization. If you don’t understand the meaning of these words and others insist on an explanation from the loan broker or lender. You can also do the research yourself so that you are certain you understand the difference between an ARM and a fixed rate loan and why you should choose one or the other, depending upon your circumstances. There are some very good primer level books and classes on almost any subject you can name out on the internet including that of a home equity loan. Terms In the case of a home equity mortgage, the word ‘terms’ can mean ‘words’ or it can mean the length of time before the loan is paid off. A loan against the equity of your home often will have a longer term than a personal loan. You may see terms of 15 years, 20 years, even 30 or 40 year terms on the loan. Of course, the longer the term, the more money in interest you will be charged and the larger the percentage of funds you pay are for the privilege of using the money rather than for the money itself. Rates The home equity loan rates are also called interest rate or interest. Interest rates are usually structured in one of two ways, although there are other types of loans as well. The fixed rate loans set an interest rate up front and it remains in effect throughout the term of the loan. The adjustable rate mortgage loan has an interest rate that will vary according to a predetermined index or formula. For example the rate may be two point above prime rate, adjustable not more than twice every two years. These requirements will vary depending upon the economy of the time. Advantages and Disadvantages A home equity loan or home equity mortgage has the advantage of being a lump sum of money that you can use in any way you see fit–presumably legal. It has the disadvantage of increasing your debt loan and increasing the cost of money sometimes significantly. For example taking out was is actually a second mortgage on your home may raise your debt to value level to the point where private mortgage insurance is mandated by many lenders. This can add thousands of dollars to the repayment amount over the years.
Home Equity Loans and How to Get the Best One
December 13th, 2009What Is A Home Equity Loan?
A home equity loan is a secured loan that uses your equity in your home as collateral. Home equity loans can be obtained at competitive interest rates and with flexible repayment terms. Many lenders are even willing to extend home equity loans to those with damaged credit; due to the fact these types of loans are less risky for the lender.
While your local bank may offer home equity loans, in many cases it is wise to look elsewhere for a home equity loan. Seek out companies that are dedicated solely to providing loans. By doing so, you increase your chances of getting better rates and better terms.
Shop around, not only for different types of lenders, but also for different types of loans. Take a look at loans with both fixed and variable interest rates. In most cases, a fixed rate loan is best, saving you from being at the mercy of fluctuating interest rates. However, there is no harm in looking at variable interest rate loans as well, just in case you find a variable interest rate loan that fits your particular needs better than a comparable fixed-rate loan.
Don’t bite off more than you can chew. There may be a temptation to take out a loan in a larger than necessary amount. Though you may be able to think of many things you could do with the extra money, you have to keep in mind that you are required to repay the money you borrow. Borrowing a huge amount may make it difficult for you to repay your loan and may lead to you losing your home and severely damaging your credit. Instead, go for a loan in an amount you can repay without a struggle.
How to Get the Best Home Equity Loan
Wondering how to get the best home equity loan? Like with so many things, the secret to getting the best deal lies in taking the time to research and compare. Obtain loan quotes from several different types of lenders to ensure you find the loan with the lowest possible rate and the best repayment terms.
Don’t stop at just comparing quotes, however. Ask plenty of questions. Speak to the lenders you contact for quotes and ask for a detailed explanation of the loan plans they offer. If there’s something you don’t understand, ask for an explanation. Though you may feel that you have enough information about interest rates and monthly payments to make a decision, it is best to make certain you know the details of the loan you are considering inside and out. Making a decision too quickly can cause you to overlook important information, ending with you paying more for your loan than is necessary.
Go ahead and negotiate. If you feel you may be able to get a better loan deal, let the lenders and brokers you are dealing with know you have other offers. Request lower interest rates and better terms from each lender and let them compete for your business. This type of negotiation just may assist you in getting a better loan deal.
Above all, read all the paperwork you receive carefully before you sign it. After you’ve read it once, read it again. Don’t overlook the fine print. Reading through all the paperwork carefully can save you tons of money and years of headaches. If the documents contain mistakes or are not what you expected, do not sign. Contact the lender to negotiate changes or take your business elsewhere.
