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There are many things to consider before applying for a fast home equity loan. First and foremost is the purpose of the loan. Secondly, home equity loans are not without risk no matter how many good selling points mortgage brokers throw at you. The reason for this is that home equity loans draw from the equity value in your home. So, if housing prices drop, which they can, the homeowner is under water financially because he or she will owe more money than the value of the home.
by EddieLamb
There are many things to consider before applying for a fast home equity loan. First and foremost is the purpose of the loan. Secondly, home equity loans are not without risk no matter how many good selling points mortgage brokers throw at you. The reason for this is that home equity loans draw from the equity value in your home. So, if housing prices drop, which they can, the homeowner is under water financially because he or she will owe more money than the value of the home.
Home equity loans do have some advantages over other types of standard loans. The two main advantages are a lower interest rate expense than other unsecured loans and interest payments are tax deductible. As a home equity loan is considered a second home loan, the rate will be higher than a first mortgage loan. The borrower should definitely shop around.
There are different types of home equity loans, as well. There is the standard home equity loan which works like a term loan and can be considered a second mortgage. Here the borrower gets a lump sum payment and pays back the loan at a fixed rate in monthly installments over the term of the loan.
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.
Another type of home equity loan is called the cash out refinancing. Here the borrower ends up with one bigger mortgage instead of two. The borrower takes out a larger loan than the existing mortgage in order to pay off the existing mortgage and keep the difference as the excess equity that has been cashed out. The borrower has many options with regards to loan terms and interest rates.
One concept to understand is that loans are limited by a loan to value ratio. In current times, post the mortgage crisis, lender have become more conservative. It is likely that the highest amount of loan one can receive would be limited to eighty percent of the value of the home. All the loans, first mortgage and home equity loans, would be considered collectively in determining the loan to value.
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.
Finally, there are also extra costs to consider when obtaining a home equity loan. These would include closing costs, title search fees, attorney fees, and appraisal charges. Also, one should keep in mind their money needs. If, for example, they are looking to consolidate their debt, then a home equity loan is more appropriate than a home equity line of credit. For funding college tuition expenses, a line of credit would be more appropriate. In all scenarios, it is best to perform at least a rudimentary cost benefit analysis.
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