Article By : Patrick Mansfield | U.S. Consumer Finance
Home Equity Loans And Lines Of Credit.
A home equity loan or line of credit can be the solution to your cash flow needs whether those are home improvements, college educations for your children or unexpected expenses. Equity simply means the difference between what your house is worth and what you owe. The difference in the two is that with a loan, you are given the lump sum amount all at once while a line of credit provides a fund that you can take money from when you need it.
Home equity loans and lines of credit should not be taken on lightly. Failure to repay them can mean the lender can force the sale of your home.
These types of loans or lines of credit can come from many different sources, and it is worth looking around because they may offer very different terms. You might speak with mortgage companies, credit unions, savings and loans, and banks as you seek the best deal. You may also talk to mortgage brokers, but they are not lenders. They simply arrange loans.
Home Equity Loans
You usually cannot borrow more than 85 percent of your equity. However, that does not mean that figuring out how much you will get from a home equity loan is simply a matter of calculating 85 percent of your equity. Your credit history and income are also part of the calculation. You repay a home equity loan in fixed amounts over a certain period of time.
Here are some steps you can take as you shop around for home equity loans:
Get lender recommendations from family and friends.
Check your credit score with one of the credit agencies.
Speak with credit unions, mortgage companies, banks, savings and loans, and mortgage brokers.
Do not hesitate to ask as many questions as necessary when lenders explain the plan to you.
Ask for the annual percentage rate and any fees associated with the loan.
- Negotiate with multiple lenders, and make them compete to get your business.
- Read everything carefully before signing, and walk away if you are not happy with the final terms.
Some of the above points require expansion. If you are already a homeowner, you are probably familiar with the concept of credit scores and what information those scores draw on including how timely your bill paying has been and whether you have late payments or collections. Credit scores also look at debt and the length of time your accounts have been open.
You need to ask about fees and APRs because these will be additional expenses to the monthly payments and interest rates. The names given to some fees may differ. Fees might also be called points or interest rate add-ons.
Here are some of the fees you should ask about:
Application or loan processing fee
Origination or underwriting fee
Lender or funding fee
Document preparation or recording fees
You should be unafraid to pit lenders against one another and ask them to lower their interest rate or fees or beat offers from other lenders. Keep in mind that even if you sign loan papers, if you decide within three days that you are not happy with the deal, you can cancel without penalty. This is known as the Three-Day Loan Cancellation Rule.
Home Equity Lines of Credit
You may also hear this referred to as a HELOC. If you do not need the full lump sum from your equity, a HELOC may have a couple of advantages over a loan. There may be tax advantages, and you should speak to a tax professional about these. Furthermore, with a HELOC, you only pay on what you borrow just as you would with a credit card.
Beware of loans with a large lump sum that must be paid when the loan ends. These are also known as balloon payments. Furthermore, keep in mind that you may have to pay off your credit line if you sell the home. Finally, it is important to remember that failure to repay either a home equity loan or a HELOC on schedule may result in foreclosure.