Updated: Apr 5
A home equity loan is loan for fixed amount of money that is secured by your home.You repay the loan with equal monthly payments over a fixed term, just like your original mortgage. If you don't repay the loan as a agreed, your lender can foreclose on your home. The amount that you can borrow usually is limited to the 85 percent of the equity in your home. The actual amount of the loan also depends on your income, credit history, and the market value.
Ask a friend and family for recommendations of lenders. Then, shop and compare terms. Talk with banks, savings and loans, credit unions, mortgage companies, and mortgage brokers. But take note: brokers don't lend money; they help arrange loans.
Ask if the lender you interview to explain the loan plans available to you. If you don't understand any loan terms and conditions, ask questions. They could mean higher costs. Knowing just the amount of the monthly payment or the interest rate is not enough. The annual percentage rate (APR) for a home equity loan takes points and financing charges into consideration. Pay attention to fees, including application or loan processing fees, origination or underwriting fee, lending or funding fee, appraisal fee, document preparation and recording fees,and broker fees;these may be quoted as points and other fees are added to your loan amount, you'll pay more to finance them.
Ask for your credit score. Credit scoring is a system that creditors use to help determine whether to give you credit.Information about you and your credit experiences--like your bill paying history, the number and types of accounts you have, late payments, collection actions, outstanding debt, and how long you've had your credit report. Creditors compare this information to the credit performance of people with similar profiles. A credit scoring system awards points for each factor that helps predict-- who is most likely a repay a debt.
A total number of points--- your credit score--- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the repayment when they're due.
Negotiate with more one leader. Don't be afraid to make lenders and brokers compete for your business by letting them know that your're shopping for best deal. Ask each lender to lower the points, fees, or interest rate, ask each to meet--- or beat-- the terms of the lenders.
Before, you sign read the loans closing papers carefully. If the loan isn't what you expected or wanted, don't sign. Either negotiate changes or walk away. You also generally have here right to cancel the deal for reason --- and without penalty --- within three days afters signing the loans papers.
Home Equity Lines Of Credits
A home equity line of credit--- also known as a H-E-L-O-C --- is a revolving line f credit, much like a credit card. You can borrow has much as you need, need any time you it, by writing a check or using a credit card connected to the account. You may not exceed your limit. Because a H-E--L-O-C is a line of credit, you make payments only on the amount you actually borrow, not the full amount available. H-E-L-O-Cs also may give you certain tax advantage unavailable with some kinds of loans. Talk to an accountant or tax adviser for details.
Like home equity loans, H-E-L-O-Cs require you to use your home as collateral for the loan. This may put your put home at risk if your payment is late or you can't make your payment at all. Loans with a large balloon payment-- a lump sum usually due at end of your loan-- may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you can't quality for refinancing. And if, you sell your home, most plans require you to pay off your credit line at the same time.
Lenders offers home equity lines of credit in a variety of ways. No one loan plan is right for every home owner. Contact different lenders, compare options, and select the home equity credit line best tailored for your needs.
How much money can you borrow on a home equity credit line?
Depending on your creditworthiness and the amount of your outstanding debt, you may be able to borrow up to 85 percent of a appraised value of your home less the amount you owe on your mortgage. Ask the lender if there is minimum withdrawal requirement when you open your account, and whether there are minimum or maximum withdrawal requirements after your account s opened. Ask how you can spend money from the line of credit-- with checks, credit cards, or both. You should find out if your home equity loan plan sets a fixed time -- a draw period --when you can withdraw money from your account. Once the draw period expires, you will be able to renew your credit line. If you can't you won't be able to borrow additional funds. In some plans, you way have to pay the outstanding balance. In others, you may be able to repay the balance over a fixed time.
What is the interest rate?
Unlike a home equity loan, the APR for home equity line of credit does not take points and financing charges into consideration. The advertised APR home equity credit lines based on interest alone. Ask about the type of interest rates available for the home equity plan. Most H-E-L-O-Cs have variable interest rates. These rate may offer lower monthly payments at first, but during the rest of the repayment period, the payments may change-- and may go up. Fixed interest rates, but the monthly payments are the same over the line of credit line.
If you're considering a variable rate, check and compare the terms. Check the periodic cap -- the limit on interest rate changes throughout the loan term. Lenders use an index, like prime rates, to determine how much to raise or lower interest rates. Ask the lender which index is used and how much and how often it can change.
Check the margin -- an amount added to the index that determines the interest you are charged. In addition, ask whether you can convert your variable rate loan to a fixed rate some time later. Sometime, lenders offer a temporarily discounted interest rate -- a rate that is usually low and lasts only for a introductory period, say six months. During this time your monthly payments are lower, too. After the introductory period ends, however, your rates (and payments) increase to true market level (the index plus margin). Ask if the rate you're offered is "discounted", and if so, find out how the rate will be determined at the end of the discount period and how more your payments could be at that time.
What are the up front closing cost?
When you take out a home equity line of credit, you pay for many of the same expenses as you did when you financed your original mortgage. These include: a application fee, title search, appraisal, attorney's fee and points (a percentage of the amount you borrow ). These expenses can add substantially to the cost of your loan, especially if you ultimately borrow little from your credit line. Try to negotiate with the lenders to see if they can pay for some of these expenses.
What are continuing costs?
In addition to upfront closing costs, some lenders require you to pay fees throughout the life of the loan. These may include an annual membership or participation fee, which is due whether you use the account, and/ or a transaction fee which is charged each time you borrow money. These fees add to the overall cost of the loan.
What are the repayment terms during the loan?
As you pay back the loan, your payments may change if your credit line has a variable interest rate, even if you don't borrow more money from your account. Find out how often and how much more your payments can change. Ask whether you are paying back both principal and interest,or interest only. Even you are paying back some principal, ask whether your monthly payments will cover the full amount borrowed or whether you will owe an additional payment of the principal at the end of the loan. In addition, you may want to ask about penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment.
What are the payment terms at the end of the loan?
Ask whether you might owe a large (balloon) payment at the end of your term. If you might, and you're not sure you want to be able to afford the balloon payment, you may want to renegotiate your repayment terms. When you take out the loan,ask about the conditions for renewal of the plan or for refinancing the unpaid balance. Consider asking the lender to agree ahead of time -- in writing -- to refinance any end-of-loan balance or extend your repayment time, if necessary.
What safeguards are built into the loan?
One of the best protections you have is the Federal Truth in Lending Act. Under the law, lenders must tell you about the terms costs of the loan plan when you get an application. Lenders must disclose the APR and payment terms and must tell you the charges to open or use the account, like an appraisal, a credit report, or attorney's fees. Lenders also must tell you about any variable-rate feature and give you a brochure describing the general features of home equity plans. The Truth Lending Act also protects you from changes in the term of the account (other than a variable-rate feature) before the plan is opened. If you decide not to enter into a plan because of change in the term, all the fees you paid must be returned to you.
Once your home equity plan is opened, if you pay as agreed, the lender, generally, may not terminate your plan, accelerate payment of outstanding balance, or change the terms of your account. The lender may halt any credit advances on your account during any period which interest rates exceed the maximum rate cap in your agreement, if your contract permits this practice. Before you sign, read the loan closing paper carefully. If the H-E-L-O-C isn't what you expected or wanted, don't sign the loan. Either negotiate changes or walk away. And like a home equity loan, you also generally have the right to cancel the deal for any reason-- and without penalty -- within three days after signing the loan papers.
(information courtesy of the FTC)