Saturday, 13 August 2011
home equity
Reverse Mortgage.
Reverse mortgages are to aging what regular mortgages are to youth. When a young couple takes out a mortgage to buy a house, they pay off the loan balance and increase their stake in the home. When an older couple takes out a reverse mortgage, they receive income from the bank instead of paying a portion of their income. Reverse mortgages are most beneficial to retirees who own their own home free and clear. In fact, applicants are required to be 62 years of age or older in order to take advantage of these types of mortgages.
Under a reverse mortgage, the lender makes payments to the borrower based on the value of the home. The catch is the mortgage comes due almost immediately after the borrower dies. Most of the time the borrower's heirs have to sell the home in order to cover the loan balance. This is actually a great deal for seniors, especially those who fall into the "home rich, cash poor" category. They own their home, but do not have much to show for a monthly income. The double stock market crashes of 2001 and 2008 took a big chunk out of most retiree's portfolios, leaving them with diminished income prospects.
Seniors can get a this mortgage through multiple sources: private lenders, state or local governments and the federal government. The federal government's Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage. The HECM program is run by the Federal Housing Administration (FHA).
Several advantages recommend these type of mortgages over other forms of income. The first is no credit check. Since the lender will make payments to the borrower, there is no necessity to check the borrower's credit. The reverse is true; the impetus is on the borrower to check the lender's credit. Another advantage is the diversity of income options. HECM reverse mortgages pay the borrower through a lump sum, monthly cash advances or a line of credit. The line of credit is the most interesting because the cash amount available increases by whatever the monthly rate is.
One major disadvantage of this mortgage is the fact that it is due almost immediately after the borrower dies. The most common method of paying off the mortgage balance is to sell the home. This means the borrower's heirs are deprived of an inherited property. This may not seem like such a big deal, but inheriting a paid-off house free and clear is quite a gift. Getting a reverse mortgage may matter to the borrower's heirs, so he would be wise to discuss it with them before making a decision. The income from a reverse mortgage comes at the price of decreasing the borrower's estate.
Article Source: http://EzineArticles.com/6473842
Friday, 5 August 2011
Mortgage Rate
Plans For Tomorrow.
Mortgage refinance is replacing an existing mortgage loan, new mortgage loans. Existing mortgage is eliminated by the new mortgage funds, which Nlk ha under different conditions, the better for the borrower. Mortgage cycle that can be taken to the bank where the existing loan or other bank.
Cycle should canvas `` about when interest rates had declined significantly compared to interest rate loan available, or when the solvency of the borrower has changed significantly, and is interested in making a redeployment of the term of the loan, and thus increase or decrease the height of the monthly payment (or alternatively, decrease or extend the duration of the mortgage).
If you are on a path that includes early repayment (fixed rate), consider the economics of the mortgage cycle with early repayment fee.
Throughout the world, most apartments are acquired through a mortgage: bank loans on special conditions, which allow buying a condo, even if you do not have the full amount needed for this.
What is a mortgage?
Mortgage is a long-term loan, usually intended to finance the purchase of an apartment.
Bank mortgage repayment guaranteed by the pledge (lien) residential dwelling or other real estate property.
In Israel there are two types of mortgages: mortgages eligible for the Housing Ministry, which is given by the Ministry of Housing or the Bank, under defined conditions in advance, through all the banks that provide mortgages (used as agents of the state for this purpose), and mortgage money in the bank, which is given by the banks, funds mobilized by them and conditions which are set according to market conditions.
For what purposes can take a mortgage?
Purchase or other real estate property ,Build a house
Renovation or expansion of the apartment.
What determines the amount of the mortgage and the amount of your monthly repayment?
Mortgage amount you receive will be determined by your monthly repayment, the asset value and collateral presented to the bank.
Taking a mortgage requires you to for a long time, large sums of money, and of course it raises quite a few concerns. To provide relief and ease the fear, we rounded the stages of the process of obtaining the mortgage from the bank: Loan application and approval in principle
First date with your mortgage consultant, you should fill out an application for a loan. So you can get approval from the bank, it should be noted the credit amount you have available, and what are the conditions for receiving it. When applying will be asked to fill in the requested amount, property value, desired loan term and type of loan you would like (for example: non-linked mortgage bearing interest at prime, linked to the CPI, etc.).
Filing and obtaining a mortgage loan
after receiving approval in principle, if you signed an agreement to purchase an apartment, you may contact the bank for opening a loan. This meeting will be asked to submit, inter alia, the following documents:
ID
Certificate of Eligibility (eligible for the Ministry of Construction and Housing)
Verification of income (for salaried employees - 3 recent salary slips, and self-employed - OK accountant or tax returns)
Contract to purchase an apartment / land
Articulate current land registration (Sales Form), or accept a recent rights Israel Lands Authority or contractors that is defined by the Israel Land Administration as a residence (where the property is not registered in the Land Registry). Should receive these documents before signing the purchase of the apartment. Ask a lawyer for the transaction is in possession of these documents, and you can save an appeal at the Land Registry.
To order a copy Phrasebook
Mortgage refinance is replacing an existing mortgage loan, new mortgage loans. Existing mortgage is eliminated by the new mortgage funds, which Nlk ha under different conditions, the better for the borrower. Mortgage cycle that can be taken to the bank where the existing loan or other bank.
Cycle should canvas `` about when interest rates had declined significantly compared to interest rate loan available, or when the solvency of the borrower has changed significantly, and is interested in making a redeployment of the term of the loan, and thus increase or decrease the height of the monthly payment (or alternatively, decrease or extend the duration of the mortgage).
If you are on a path that includes early repayment (fixed rate), consider the economics of the mortgage cycle with early repayment fee.
Throughout the world, most apartments are acquired through a mortgage: bank loans on special conditions, which allow buying a condo, even if you do not have the full amount needed for this.
What is a mortgage?
Mortgage is a long-term loan, usually intended to finance the purchase of an apartment.
Bank mortgage repayment guaranteed by the pledge (lien) residential dwelling or other real estate property.
In Israel there are two types of mortgages: mortgages eligible for the Housing Ministry, which is given by the Ministry of Housing or the Bank, under defined conditions in advance, through all the banks that provide mortgages (used as agents of the state for this purpose), and mortgage money in the bank, which is given by the banks, funds mobilized by them and conditions which are set according to market conditions.
For what purposes can take a mortgage?
Purchase or other real estate property ,Build a house
Renovation or expansion of the apartment.
What determines the amount of the mortgage and the amount of your monthly repayment?
Mortgage amount you receive will be determined by your monthly repayment, the asset value and collateral presented to the bank.
Taking a mortgage requires you to for a long time, large sums of money, and of course it raises quite a few concerns. To provide relief and ease the fear, we rounded the stages of the process of obtaining the mortgage from the bank: Loan application and approval in principle
First date with your mortgage consultant, you should fill out an application for a loan. So you can get approval from the bank, it should be noted the credit amount you have available, and what are the conditions for receiving it. When applying will be asked to fill in the requested amount, property value, desired loan term and type of loan you would like (for example: non-linked mortgage bearing interest at prime, linked to the CPI, etc.).
Filing and obtaining a mortgage loan
after receiving approval in principle, if you signed an agreement to purchase an apartment, you may contact the bank for opening a loan. This meeting will be asked to submit, inter alia, the following documents:
ID
Certificate of Eligibility (eligible for the Ministry of Construction and Housing)
Verification of income (for salaried employees - 3 recent salary slips, and self-employed - OK accountant or tax returns)
Contract to purchase an apartment / land
Articulate current land registration (Sales Form), or accept a recent rights Israel Lands Authority or contractors that is defined by the Israel Land Administration as a residence (where the property is not registered in the Land Registry). Should receive these documents before signing the purchase of the apartment. Ask a lawyer for the transaction is in possession of these documents, and you can save an appeal at the Land Registry.
To order a copy Phrasebook
Stop these Recession madness
How to cut your cost of living
Everything's getting more expensive -- mortgage payments, utility bills, groceries, taxes, gas. You name it, it costs more these days.
That's why we've pulled together dozens of cost-cutting ideas that will help you make ends meet.
Some will save only a few bucks a week. Others can lower your expenses by hundreds of dollars a month.
You can't possibly use them all. But finding a few that work for you can make it a lot easier, and less stressful, to keep up with your bills.
Cut your coffee costs. Skip that pricey morning latte. This is the most often repeated advice for saving money because it works. Save $2 a day, $14 a week, $56 a month. Try your office coffee. Many employers have upgraded to machines that brew one cup at a time with a variety of flavor options. It's not the office sludge anymore.
Skip the vending machine at work. Buy snacks at the supermarket and stash them in your locker or desk drawer. Better yet, go to your local health food store where you can buy trail mix in bulk. This isn't hippie food. The mixture of nuts and chocolate and dried fruit is cheap and healthy.
Use one phone. Got a cell phone and a land line? Ditch one. If you're sticking with the cell phone, take a closer look at your plan. Do you really need all those bells and whistles? You can save big by dropping the fancy plan for basic service, but before making the switch, make sure your savings won't be eaten up by penalties for breaking your contract. When shopping around for a new cell phone, use Billshrink.com to compare plans.
Make the most of Internet discounts. Use sites such as Penny Pincher Gazette to find printable online coupons. Look for savings on products you buy and use all the time.
Find more store-branded products you can trust. Whether its green beans or toilet paper, store brands are almost always cheaper than name brands. Take advantage of that by substituting store products for name brands you frequently buy to see if the quality is comparable or at least acceptable.
Cut back on dining out. Pack a lunch for work. Don't eat dinner out quite as often and use the coupons you get in mailers and Sunday newspapers to hold down the bill when you do visit a restaurant.
Drop your cable. You can live without it -- really. Most shows come out on DVD, or you can watch them for free on Hulu.com and Fancast.com. Plus, for under $10 a month, you can get a Netflix subscription that streams movies and premium cable television shows through your computer, Wii, Xbox, PS3 or Internet-capable HDTVs. Sound too radical? Then cancel the premium movie channels you rarely watch and ask your cable company to match the best deal on basic service being offered by a competitor. It will often do so.
Cancel your gym membership. Working out is a wonderful way to maintain your health and lower medical expenses down the road. But most people who join a gym never go. If that's you, stop making the monthly payments.
Redo your commute. Never thought public transit was worth it? With gas prices often on the rise (and, in many places, toll prices), it could be now. Look into carpooling with coworkers, or check for folks with similar routes at eRideShare.com. Working from home one or two days a week or switching to a four-day workweek are other ways to cut commuting costs.
Pull that lawnmower out of the shed. Having your yard manicured by a landscaping service is great, but it's getting more expensive. Indeed, your lawn care bills may be one of those rapidly rising bills that prompted you to read this story. Mowing it yourself is not only less costly but good exercise. You can also save big by not watering your lawn through the summer. Most varieties of grass go dormant in August because of the heat, then go through a growth spurt in September. So let it lie in August instead of forcing it to go green with water it doesn't want.
Shop for cheaper car insurance. If you've been with the same car insurance company since you got your license, you could be paying too much. Just make sure to check comparable levels of coverage and beware of ridiculously low rates from insurers you never heard of -- they often refuse to pay when you have a claim.
Downsize your ride. For many of us, car payments are our second-largest monthly bill. Once gas and insurance are included, total transportation costs can rival rent or mortgage payments. Switching to a smaller car or truck can reduce your monthly payments and save on gas and insurance, too.
Cut your heating and cooling costs. The Energy Star auditing program is a must do. Created by the U.S. Environmental Protection Agency and Department of Energy, it sends a contractor to your home to assess your furnace and air conditioner, doors and windows, appliances and insulation. The audits aren't free, but some utilities will cover the cost. New Jersey Natural Gas customers, for example, are eligible for a rebate that reimburses them for the $250 charge. Go to this site to find an auditor near you.
Everything's getting more expensive -- mortgage payments, utility bills, groceries, taxes, gas. You name it, it costs more these days.
That's why we've pulled together dozens of cost-cutting ideas that will help you make ends meet.
Some will save only a few bucks a week. Others can lower your expenses by hundreds of dollars a month.
You can't possibly use them all. But finding a few that work for you can make it a lot easier, and less stressful, to keep up with your bills.
Cut your coffee costs. Skip that pricey morning latte. This is the most often repeated advice for saving money because it works. Save $2 a day, $14 a week, $56 a month. Try your office coffee. Many employers have upgraded to machines that brew one cup at a time with a variety of flavor options. It's not the office sludge anymore.
Skip the vending machine at work. Buy snacks at the supermarket and stash them in your locker or desk drawer. Better yet, go to your local health food store where you can buy trail mix in bulk. This isn't hippie food. The mixture of nuts and chocolate and dried fruit is cheap and healthy.
Use one phone. Got a cell phone and a land line? Ditch one. If you're sticking with the cell phone, take a closer look at your plan. Do you really need all those bells and whistles? You can save big by dropping the fancy plan for basic service, but before making the switch, make sure your savings won't be eaten up by penalties for breaking your contract. When shopping around for a new cell phone, use Billshrink.com to compare plans.
Make the most of Internet discounts. Use sites such as Penny Pincher Gazette to find printable online coupons. Look for savings on products you buy and use all the time.
Find more store-branded products you can trust. Whether its green beans or toilet paper, store brands are almost always cheaper than name brands. Take advantage of that by substituting store products for name brands you frequently buy to see if the quality is comparable or at least acceptable.
Cut back on dining out. Pack a lunch for work. Don't eat dinner out quite as often and use the coupons you get in mailers and Sunday newspapers to hold down the bill when you do visit a restaurant.
Drop your cable. You can live without it -- really. Most shows come out on DVD, or you can watch them for free on Hulu.com and Fancast.com. Plus, for under $10 a month, you can get a Netflix subscription that streams movies and premium cable television shows through your computer, Wii, Xbox, PS3 or Internet-capable HDTVs. Sound too radical? Then cancel the premium movie channels you rarely watch and ask your cable company to match the best deal on basic service being offered by a competitor. It will often do so.
Cancel your gym membership. Working out is a wonderful way to maintain your health and lower medical expenses down the road. But most people who join a gym never go. If that's you, stop making the monthly payments.
Redo your commute. Never thought public transit was worth it? With gas prices often on the rise (and, in many places, toll prices), it could be now. Look into carpooling with coworkers, or check for folks with similar routes at eRideShare.com. Working from home one or two days a week or switching to a four-day workweek are other ways to cut commuting costs.
Pull that lawnmower out of the shed. Having your yard manicured by a landscaping service is great, but it's getting more expensive. Indeed, your lawn care bills may be one of those rapidly rising bills that prompted you to read this story. Mowing it yourself is not only less costly but good exercise. You can also save big by not watering your lawn through the summer. Most varieties of grass go dormant in August because of the heat, then go through a growth spurt in September. So let it lie in August instead of forcing it to go green with water it doesn't want.
Shop for cheaper car insurance. If you've been with the same car insurance company since you got your license, you could be paying too much. Just make sure to check comparable levels of coverage and beware of ridiculously low rates from insurers you never heard of -- they often refuse to pay when you have a claim.
Downsize your ride. For many of us, car payments are our second-largest monthly bill. Once gas and insurance are included, total transportation costs can rival rent or mortgage payments. Switching to a smaller car or truck can reduce your monthly payments and save on gas and insurance, too.
Cut your heating and cooling costs. The Energy Star auditing program is a must do. Created by the U.S. Environmental Protection Agency and Department of Energy, it sends a contractor to your home to assess your furnace and air conditioner, doors and windows, appliances and insulation. The audits aren't free, but some utilities will cover the cost. New Jersey Natural Gas customers, for example, are eligible for a rebate that reimburses them for the $250 charge. Go to this site to find an auditor near you.
Loans Fraud
Home equity loan fraud
Leading up to the mortgage crisis, home equity loan fraud was rampant. Some fraudulent lenders were charging excessive fees at closing. Others were offering multiple refinances to the same borrower. Still others would ask you to sign over your deed to them if you were struggling to make payments, and then evict you from your home once you did. Thanks to aggressive government crackdowns, these schemes are no longer active.
The Federal Housing Administration (FHA) has enacted several rules and regulations that make the homeowner less vulnerable to home equity loan fraud. They now require that the borrower must receive specific information on interest rates and fees. As a result, it’s less likely that a lender can take advantage of an uneducated borrower. The FHA also has a list of fees that the lender may not charge a borrower. If your lender tries to tack these on to the loan, you can file a complaint directly with the FHA.
Unfortunately, identity fraud thieves have discovered a whole slew of possible targets in the home equity loan arena. If a criminal is able to get his hands on vital personal information, like your Social Security number, birth date, and/or passwords to your bank accounts, he can do severe damage. Once a thief has this information, he can set up telephonic banking privileges on your account, then transfer money from your HELOC into his own personal bank account. Once that happens, the criminal – and the money – disappears forever.
In order to protect yourself from identity theft that could lead to home equity loan fraud, take the following precautions:
1. Always use a shredder to trash documents that may expose your personal financial data. These should also be used for all those credit card offers that you get in the mail. If a criminal gets his hands on this, he can open up credit in your name.
2. If you’re sending out checks, do it at the post office or at a drop-off box, and not from your home mailbox. Mail theft is a common crime.
3. Don’t use your mother’s maiden name, or anything that can be obviously tied to you, as a password. Make up a password that has nothing to do with your vital information.
4. Never give out your Social Security number to someone you don’t know who initiates a phone call. If you don’t know the caller, ask for a callback number … then, YOU make the call, to verify that the caller is legitimate.
5. Don’t put your telephone number or your Social Security number on your checks.
6. Monitor all your bank and credit card statements carefully every month. If something looks suspicious, you can catch the problem early and save yourself time and money.
Most people will never encounter home equity loan fraud, but if you choose to tap your equity with a HEL or a HELOC, it’s better to be safe than sorry.
If your problems are greater than a short-term reduction would solve, your lender may offer to take a lump sum to close out your loan. This is called a settlement offer. This may be the best possible outcome for a homeowner who wants to keep his house, but can’t afford the second lien payments. No matter what happens, though, your credit score will take a huge hit, and it may be some time before you can get any type of mortgage again.
Start here to compare home equity rates from top lenders in our network.
Leading up to the mortgage crisis, home equity loan fraud was rampant. Some fraudulent lenders were charging excessive fees at closing. Others were offering multiple refinances to the same borrower. Still others would ask you to sign over your deed to them if you were struggling to make payments, and then evict you from your home once you did. Thanks to aggressive government crackdowns, these schemes are no longer active.
The Federal Housing Administration (FHA) has enacted several rules and regulations that make the homeowner less vulnerable to home equity loan fraud. They now require that the borrower must receive specific information on interest rates and fees. As a result, it’s less likely that a lender can take advantage of an uneducated borrower. The FHA also has a list of fees that the lender may not charge a borrower. If your lender tries to tack these on to the loan, you can file a complaint directly with the FHA.
Unfortunately, identity fraud thieves have discovered a whole slew of possible targets in the home equity loan arena. If a criminal is able to get his hands on vital personal information, like your Social Security number, birth date, and/or passwords to your bank accounts, he can do severe damage. Once a thief has this information, he can set up telephonic banking privileges on your account, then transfer money from your HELOC into his own personal bank account. Once that happens, the criminal – and the money – disappears forever.
In order to protect yourself from identity theft that could lead to home equity loan fraud, take the following precautions:
1. Always use a shredder to trash documents that may expose your personal financial data. These should also be used for all those credit card offers that you get in the mail. If a criminal gets his hands on this, he can open up credit in your name.
2. If you’re sending out checks, do it at the post office or at a drop-off box, and not from your home mailbox. Mail theft is a common crime.
3. Don’t use your mother’s maiden name, or anything that can be obviously tied to you, as a password. Make up a password that has nothing to do with your vital information.
4. Never give out your Social Security number to someone you don’t know who initiates a phone call. If you don’t know the caller, ask for a callback number … then, YOU make the call, to verify that the caller is legitimate.
5. Don’t put your telephone number or your Social Security number on your checks.
6. Monitor all your bank and credit card statements carefully every month. If something looks suspicious, you can catch the problem early and save yourself time and money.
Most people will never encounter home equity loan fraud, but if you choose to tap your equity with a HEL or a HELOC, it’s better to be safe than sorry.
If your problems are greater than a short-term reduction would solve, your lender may offer to take a lump sum to close out your loan. This is called a settlement offer. This may be the best possible outcome for a homeowner who wants to keep his house, but can’t afford the second lien payments. No matter what happens, though, your credit score will take a huge hit, and it may be some time before you can get any type of mortgage again.
Start here to compare home equity rates from top lenders in our network.
Home Equity Loans
Home Equity.
If you’re a homeowner in need of money, and have accumulated equity in your property, you may be able to convert this equity into cash. People choose to draw on their home equity because loan rates are significantly lower than other types of borrowing, like personal loans or credit cards. There are also tax advantages associated with home equity loans, because the interest may be tax deductible within certain limitations. Another reason that home equity loans are appealing is that closing costs are relatively low.
Home equity loans are also known as second mortgages because they are subordinate to your primary mortgage. If you can’t afford to make your mortgage payments and subsequently default, the first mortgage gets paid off first from any proceeds of a sale. As a result, there is much more risk for lenders who give you a home equity loan.
Understanding the different types
There are two types of second mortgages: the home equity loan, which is also known as a HEL, and the home equity line of credit, which is also called a HELOC.
A home equity loan is a fixed-rate loan, where the lender will give you a lump sum of money, and you pay it back during a specified period of time. Payments are higher than they would be with a HELOC, because each month, you’re paying interest and principal. They are most appropriate if you’re borrowing for a project where you know exactly how much money you’ll need, and you like the consistency of a steady monthly payment. One great advantage of a HEL over a HELOC is that you will continue to build equity in your home each month as you pay the loan back.
A HELOC offers much more flexibility than its second mortgage counterpart. A lender will give you a line of credit, which you can draw from on an as-needed basis. It functions a lot like a credit card, except that the interest rate is lower. HELOCs have a variable interest rate that is tied to an index, like the prime rate or the LIBOR, and will change every month. You’ll be allowed to take money out during the draw period, which is generally about 10 years. Most banks allow you to pay interest only during the draw period. However, if you choose that path and don’t pay down your principal, it will continue to accumulate. At the end of the draw period, you’ll be required to pay back any remaining principal either as a lump sum, or on an amortized basis, and will no longer be able to withdraw any additional funds.
There are some major drawbacks with HELOCs. One is that if you make payments of only interest, you’re not building any home equity. The second is that, because the interest rate is variable, you have no idea how to budget for the HELOC expense.
How much can you borrow?
Most banks will allow you to borrow up to 80 percent of the available home equity in your property. To calculate that amount, determine the current value of your home. Your next step is to subtract the value of your current mortgage. Divide the number by 80%, and bingo … you now have the maximum amount of home equity that you may be qualified to borrow against.
Advantages and disadvantages of home equity loans
Both home equity loans and HELs offer several advantages when compared to other types of borrowing. First, the application process is much quicker than with a traditional loan. Some banks may even approve you on the spot if you don’t want to borrow too much and you have a good credit report.
Second, home equity loans can be amortized for up to 30 years, which can make your monthly payments much easier to manage. Third, interest is generally tax-deductible, and interest rates are lower than with other comparable borrowing opportunities. Finally, if you have a large amount of equity accumulated in your home, you have access to a significant sum of cash.
So far, everything sounds good. But there are many risks associated with home equity loans. The biggest drawback is that if you can’t make your payments, a bank could foreclose on your property. If you make late payments, you may be hit with hefty fees. Banks will report your tardiness to the credit reporting agencies, and your credit rating could take a big hit. And even though mortgage rates for home equity loans are lower than credit card rates, they will be significantly higher than rates for traditional mortgages.
Another risk that’s associated with HELOCs is that when the rate adjusts, you may not be prepared for the higher payments. Say, for example, that you borrow against your line of credit to send your child to college when interest rates are low – in the 4 to 5 percent range. Then you find yourself in an environment where interest rates are rising, and you’re now paying 7 to 8 percent interest. If you’re not prepared, you could find it difficult to make the higher monthly payment.
If you’re a homeowner in need of money, and have accumulated equity in your property, you may be able to convert this equity into cash. People choose to draw on their home equity because loan rates are significantly lower than other types of borrowing, like personal loans or credit cards. There are also tax advantages associated with home equity loans, because the interest may be tax deductible within certain limitations. Another reason that home equity loans are appealing is that closing costs are relatively low.
Home equity loans are also known as second mortgages because they are subordinate to your primary mortgage. If you can’t afford to make your mortgage payments and subsequently default, the first mortgage gets paid off first from any proceeds of a sale. As a result, there is much more risk for lenders who give you a home equity loan.
Understanding the different types
There are two types of second mortgages: the home equity loan, which is also known as a HEL, and the home equity line of credit, which is also called a HELOC.
A home equity loan is a fixed-rate loan, where the lender will give you a lump sum of money, and you pay it back during a specified period of time. Payments are higher than they would be with a HELOC, because each month, you’re paying interest and principal. They are most appropriate if you’re borrowing for a project where you know exactly how much money you’ll need, and you like the consistency of a steady monthly payment. One great advantage of a HEL over a HELOC is that you will continue to build equity in your home each month as you pay the loan back.
A HELOC offers much more flexibility than its second mortgage counterpart. A lender will give you a line of credit, which you can draw from on an as-needed basis. It functions a lot like a credit card, except that the interest rate is lower. HELOCs have a variable interest rate that is tied to an index, like the prime rate or the LIBOR, and will change every month. You’ll be allowed to take money out during the draw period, which is generally about 10 years. Most banks allow you to pay interest only during the draw period. However, if you choose that path and don’t pay down your principal, it will continue to accumulate. At the end of the draw period, you’ll be required to pay back any remaining principal either as a lump sum, or on an amortized basis, and will no longer be able to withdraw any additional funds.
There are some major drawbacks with HELOCs. One is that if you make payments of only interest, you’re not building any home equity. The second is that, because the interest rate is variable, you have no idea how to budget for the HELOC expense.
How much can you borrow?
Most banks will allow you to borrow up to 80 percent of the available home equity in your property. To calculate that amount, determine the current value of your home. Your next step is to subtract the value of your current mortgage. Divide the number by 80%, and bingo … you now have the maximum amount of home equity that you may be qualified to borrow against.
Advantages and disadvantages of home equity loans
Both home equity loans and HELs offer several advantages when compared to other types of borrowing. First, the application process is much quicker than with a traditional loan. Some banks may even approve you on the spot if you don’t want to borrow too much and you have a good credit report.
Second, home equity loans can be amortized for up to 30 years, which can make your monthly payments much easier to manage. Third, interest is generally tax-deductible, and interest rates are lower than with other comparable borrowing opportunities. Finally, if you have a large amount of equity accumulated in your home, you have access to a significant sum of cash.
So far, everything sounds good. But there are many risks associated with home equity loans. The biggest drawback is that if you can’t make your payments, a bank could foreclose on your property. If you make late payments, you may be hit with hefty fees. Banks will report your tardiness to the credit reporting agencies, and your credit rating could take a big hit. And even though mortgage rates for home equity loans are lower than credit card rates, they will be significantly higher than rates for traditional mortgages.
Another risk that’s associated with HELOCs is that when the rate adjusts, you may not be prepared for the higher payments. Say, for example, that you borrow against your line of credit to send your child to college when interest rates are low – in the 4 to 5 percent range. Then you find yourself in an environment where interest rates are rising, and you’re now paying 7 to 8 percent interest. If you’re not prepared, you could find it difficult to make the higher monthly payment.
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