A home equity loan can be a very good thing if you formulate a plan and stick to it. Home equity loans are becoming much more common and most banking companies have specific re-financing plans available for today’s consumer.

Read on and you will see that a home equity loan used for the proper purpose and managed correctly can indeed be a “good thing”.

A Home Equity Loan – Just what is it?Types Of Home Equity Loans HEL or HELOC?

There are two types of home equity loans. A regular home equity loan and the home equity line of credit or HELOC. A regular home equity loan is a fixed sum borrowed at a fixed rate over a period of time. A HELOC allows the client to borrow various sums up to a fixed amount over a period of time. A line of credit works in a similar way as a credit card; you use it when you need it. Different States set their own laws on limits you can borrow against your house.

The Financial Plan – Making your home equity work for you

For a home equity loan to work best for you, it’s a good idea to have a budget and a financial plan. Having a budget will help you decide how big a loan you need and a financial plan will be the map to accomplish your goals within that budget. Here are a few suggestions on ways to use a home equity loan.

1. Home Improvements

You may want to build up the equity in your house by making home improvements. The first and best place to visit is a home improvement warehouse store. These stores, especially the large ones have whole rooms set up and priced. Use caution however, husbands and wives have been known to have gone into these rooms for days and when they came out they were muttering “but I liked the blue room best.”

2. Debt Consolidation

Pay off all the nagging little balances that seem to have accumulated on various store and gas cards in your wallet.

3. A holiday in the sun or snow!

It’s a matter of interest, if you shop around; you may find a couple of percentage points on a home equity loan that can make a world of difference. Consider a holiday South of the border or North to Canada.

Mexican or Caribbean destinations are very attractive during the winter months but if skiing and winter activities is more to your liking then consider Vancouver, Canada. Whistler, British Columbia is one of the locations that will host the 2010 Winter Olympics. Shop around for the best rates and dream on.

4. A retirement Savings plan

It’s not an easy fact to accept but one day we will all need to retire. Planning for retirement requires good financial decision making. Many banking and financial companies offer free retirement planning advice. Some home equity loans are designed to be used for investment purposes. Talk to a trusted Financial Planner before signing the dotted line on this idea.

Loan Terms – Points To Ponder

Now you have a plan and are ready to talk with a lending company. You may want to do this on the Internet to save time and maybe a few dollars. If that is the case then it is a must to know these terms. Before you proceed to do some serious web surfing here are a few you will want to become familiar with before you consider a home equity loan. These points to ponder are:

Equity

Equity is the appraised value or Fair Market Value of your home less the outstanding mortgage balance.

Mortgage Broker

A mortgage broker is the “go between” whom you pay to negotiate the best deal. This person has access to current financial information and can be very important if financial savvy is not your strong suit.

HELOC

A HELOC is a Home Equity Line Of Credit. This term is discussed under types of home equity loans.

Debt Consolidation Loan

Over the years as you have paid off your home, you may have also acquired a few credit cards along the line. These credit cards include gas cards, store credit cards, and some bank credit cards. The interest rates on these cards vary and you may find that you are paying through the nose for the convenience of a store credit card. That is where a home equity loan can be very handy. You can borrow the amount you need to pay off each card and make one payment each month. With current financing plans, one payment at the end of the month is less than the minimum payment that was required on each card. Once you have done this, get out your scissors and cut up all of the cards except one bank credit card for emergencies. Remember the plan!

Balloon Loan

This type of loan can be difficult. The first few payments are low with low interest rates. The last payment however is exactly as the name describes; a balloon. It is a very large payment at the end of the repayment period. It is essential to stick to your financial plan because in this case you may need another loan to pay off the balloon amount.

Interest Rate

The periodic fee charged for a loan. This is expressed as a percentage point and some financial institutions are offering approximately 5.6% on a thirty year fixed $150,000.00 home equity loan. The lower the interest rate the better the deal, just make sure you aren’t negotiating a balloon loan though.

Transaction Fee

Unfortunately no matter how good the deal on the loan you get, there is no free ride. In the business of credit management someone has to make money in order for home equity loans to exist. There will be some type of transaction fee built into the loan application. Lenders have costs and these costs are passed along to the consumer as a transaction fee. Depending on the loan company you decide to use, a transaction fee can be lower or higher, so make sure you shop around.

FICO Score

A sliding scale based on a point score created by the Fair Isaac Corporation. This score is used to determine a borrower’s behavior and potential risk factor.

Credit Rating

Using the point system based on the FICO score, a credit rating can be anywhere from poor to excellent. With a good to excellent FICO score, a person’s credit rating can determine how much money can be borrowed and what interest rate will be charged.

Re-Financing – Finding A Gold Mine In Your Home

Many people consider their home to be their castle but few consider that they could be living on a potential gold mine. If you have lived in your house for 10 years and have been making payments, especially bi-monthly payments, you have built up a considerable amount of equity. Pair that with a good FICO score and there is indeed gold in that there house.

What’s Your Fico?

Mortgage Brokers use a FICO scale to determine the amount of money you can borrow against your home and at what interest rate you can borrow this money. This number is between 300 – 850 points and showcases a person’s credit history.
This scale was developed in California by the Fair Isaac Corporation, a global decision management company. A credit rating of 700 points is considered “good” and based on a $150,000.00 fixed thirty year mortgage, your rate of interest would be 5.7 percent VS 9.3% if your FICO score was below 600 points. Having a high FICO entitles you to borrow more money at a better rate.

Improving Your Fico

You’ve taken the test, (which is available at most lenders websites), and your score is not as stellar as you had hopped it would be. There are a couple of ways to improve this score:

1. Pay all your bills on time.

2. Keep a small balance on one credit card to keep it “active”.

The FICO website gives you all the “who, what, where, when and why” of the two above suggestions. You can read about the rationale in great detail at that site.

Buyers Beware

With today’s credit options and a good credit rating, you can borrow a lot of money against your home. This ability if not used responsibly and with a good solid financial plan can be ruinous. Some borrowers have gotten over their head and ultimately had to file for bankruptcy. So beware of potential risks.

Home Equity Loans – A Golden Opportunity

As you can see, a home equity loan is a great way to improve your living space, go on a holiday, plan for retirement or pay off some debts. With the right combination of a good FICO score and proper planning, there really is gold in that there house.

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.