Home Equity Loans

May 18, 2012

Home equity loans allow homeowners to tap into the investments in their homes. If you own your home there is the temptation to draw on your equity to cover bills or get treats for yourself. This is sometimes done through a home equity loan.

While this might be good for major home repairs medical bills or education, it is not suggested for frivolous things as the money will have to be paid back.

Benefits of Home Equity Loans

The common home equity loans give you a lump sum of money that can be used for a single thing, like debt consolidation, emergency roof repairs, paying for a wedding or similar. Fixed interest rates and payments can help you budget these large expenses over the long term. If you need a new car then this type of loan can be good for such a purchase as interest is tax deductible on these loans but not on a car loan.

In order to get a home equity loan the person applying must have a good to excellent credit history, and the equity on the home needs to cover the risk taken by the lender and you income needs to be high enough to prove you can repay the loan.

Different From Home Equity Line of Credit

Many people confuse home equity loans with home equity lines of credit (HELOC).

While a home equity loan gives you fixed rate and payments over the life of the loan, home equity lines of credit are different in that they are revolving credit lines with adjustable interest.

It is like a secured credit card that borrows against the home equity.

HELOC allow you to draw off your equity over time like for long term remodeling, paying for college educations, or other periodic large expenses. The flexibility of this type of loan might be a good thing for some, as it allows for only taking the money needed, not the entire sum approved for.

What About The Fees & Mortgage Rates?

There are fees involved for having this type of loan including appraisal fees, Originator fees, title fees, arrangement fees, closing fees, early repayment fees, and stamp duties. You might also be charged for surveyor, conveyor, or valuations assessments. Providing your own evaluator may prove cheaper than having the loan company find one.

Fixed rate home equity loans typically roll any other second mortgages into the debt, which means to refinance all your existing second mortgage, so you will need to have enough equity to borrow enough to cover those plus whatever you need the money for.

Interest on these home loans, which can be 10, 15, 20, or 30 years in length is often tax deductible as long as they are on your primary home. A longer term will give you lower payments, but you will pay more in interest on that money then of you do a shorter term loan. Loan amounts can vary from 80 to over 100 percent of the home’s market value, including the existing mortgage, providing your income is high enough to prove you can pay it back.

Although home equity loans are secured against the title or deed of the property and limited by the overall equity value, the terms of these loans can vary widely. You can get zero points or zero cost loans, cash out loans, or FHA insured loans.

The loan rates vary based on not only market conditions but things like credit scores income, and loan to value ratio.

Documents Needed To Apply

In order to apply for one of these home equity loans through your preferred lending agency you will have to provide certain documents to prove your income (w-2′s, tax returns, paycheck stubs), copies of bills and expenses including your existing mortgage, any credit card or other short term loans, and the amount that you can pay toward the new loan you are asking for.

A general guideline is that lenders will want to make sure that the percentage of your income going to pay these fixed expenses is no more then 36%.

Be Prepared Before Applying

If you are not sure, there are a few things you can do to make the process easier.

1. Get your credit rating in as good a shape as possible. If you need to reduce debt from high interest credit cards don’t let yourself fall behind while you are trying to secure this type of loan and seek to pay off a couple of the smaller bills if you can. Go to credit counseling if you need to.

2. Check out your credit report yourself and see where you stand.

3. Don’t overlook local connections. Try your bank first, and have that credit report with you. Having them look at the score you have before you apply can help you narrow down what you need to fix before you apply. Once you do apply the credit score will drop, so you need to be sure you qualify before starting the application for home equity loans.