Some Thoughts On Home Equity Loan Tips | Mortgage

by EddieLamb

A fast home equity loan is not always prudent depending on your situation. First of all, one should understand that a home equity loan takes out equity from your home price appreciation. Therefore, if home prices drop, this can be a cause of concern because the homeowner will now owe more than the value of the house. Also, one should take the time to shop around for the best rates possible.

However, home equity loans do have some advantages. One advantage is the low interest payments when compared to unsecured loans such as credit cards. The interest payments will, however, be higher than a primary mortgage because of the higher risk profile associated with an increase in borrowing. For this reason, it behooves the borrower to shop around for a good rate. Another advantage is that the interest payments are tax deductible.

There are different categories of home equity loans. The basic home equity loan is comparable to a term loan. The interest payments are fixed for a fixed maturity. The benefit here is that the borrower receives a lump sum payment up front for his or her needs, such as home improvements.

A home equity line of credit is another kind of loan that behaves like a revolver or credit card. Here the equity in the home is used as a line of credit. No interest is charged until there is an actual withdrawal on the line of credit. The type of interest rate is usually a floating rate and there can be extra fees depending the loan structure.

Lastly, there is something called a cash out refinancing. In this scenario, the homeowner takes out a loan greater than the current mortgage but lower than the market value of the loan. The borrower than repays the initial mortgage and assumes this new larger loan as the new mortgage. The extra cash difference is the amount effectively being drawn out of the equity in the home. Here the term and interest rate payments can be variable or fixed.

In the aftermath of the mortgage crisis, lenders have become more conservative or prudent in their practices, one hopes. Therefore, one concept to understand is the loan to value ratio. The important factor here is that if one has built up say one hundred thousand dollars of equity in the home, the homeowner will not be able to realize the full hundred thousand unless if they sell the home. The loan to value ratio limits the amount one can borrow against the equity in their home.

In taking out a home equity loan, its is usually prudent to take the shortest term available that fits into the monthly budget. This will help reduce the total interest expense. Another thing of note is that although interest rates on home equity loans are low relative to credit cards and other unsecured loans, they are higher than first mortgage loans as they have a higher risk profile.

When deciding on the type of loan and lender, closing fees and other charges such as title search, attorney fees, and appraisal costs need to be taken into account and not just the interest rate cost. Additionally, one should select the type of loan that fits their needs. For example, for debt consolidation it is probably more prudent to take out a home equity loans versus a home equity line of credit which would be more pertinent for college tuition where the payments are spread out over a period of time and can vary. Its always useful to perform a cost benefit analysis.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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