Home Equity Line of Credit Helpful Tips on Home Equity Loans
Posted by LauraDerbyshire on May 25th, 2020
We've all been there: life gives you a bad hand and you unexpectedly need money you don't have. At times like this, it is important to remember the best asset you have: your home. You can consider refinancing as a way to help you through difficult times.
One option you have is a home equity loan. Home equity lines give homeowners quick access to extra money in times of need.
What is a home equity loan?
A Home equity loan line of credit allows you to borrow against the value of your home. The loan limit is generally determined by estimating a percentage of the value of your home (75% or 85% of the value of the home, if your credit is good) and subtracting what you still owe on the first mortgage. Home equity lines generally allow you to withdraw funds from the account using special checks or credit cards. The terms of the specific loan will determine the duration of the loan, the duration of the "withdrawal period" (the period of time during which you can withdraw money from the loan), interest rates, the minimum and maximum amount that you can withdraw at any time , and the method and payments with which the loan will be paid.
For example, some home equity loans may credit payments only against the interest owed on the loan, leaving the borrowed amount to be paid in full at the end of the loan period. Other loans may simply have a higher than usual payment, called a lump sum, as the last payment. However, it may be helpful to keep in mind that the interest you pay is generally tax deductible, meaning you will get it back on your tax returns; If managed correctly, this "bonus" money can balance the impact of a large final payment on the loan.
Conversely, taking out a second mortgage on your home will give you the money back at once. Mortgages generally have fixed interest rates, which can be set slightly higher than the introductory rates of a home equity loan. On the positive side, however, the rates and payments on a second mortgage will not change, while the variable interest rates on a home equity loan can mean a payment that is constantly increasing over the years.
Buy a home equity loan
Buying a home equity line of credit is like buying almost anything else - many different lenders offer many different options. To make the decision that best meets your needs, you must be prepared to obtain and compare quotes from many different lenders.
Most home equity loans have variable interest rates, which are determined by an index. When comparing home equity loans, you need to know the rate each loan uses to determine its interest rate. Variable interest rates also have a couple of limits that are important for you to know, as they limit how far and how fast the interest rate can rise. The periodic limit limits how much the rate can change at one point in time, and the lifetime limit limits how much the rate can change over the life of the loan. It is also important to know if the rate you have been quoted is a discounted introductory rate; if so make sure you know how long the introductory period lasts and what the rate will be when it ends.
If you are comparing a home equity line of credit with a second mortgage, understand the differences between them. Mainly, when comparing the costs of both, keep in mind that the APR we quote you on the second mortgage will be the only cost of the loan, while home equity loans also have account fees and other charges that are not included in the APR.
Costs to consider
"For a true comparison of credit costs, compare other charges, such as points and closing costs, that will add to the cost of your home equity loan," advises the Federal Trade Commission (FTC) in its document, "Lines of credit with mortgage guarantee ". The Truthfulness of Loans Act requires lenders to be open about the terms and costs of a loan, but you may need to request this information in advance if you make a purchase comparison before committing to a lender.
o Application Fee: To qualify for the credit, you must submit an application to the lender. This application will allow the lender to verify your credit score and debt / income ratio, two important factors in determining your sun.Also See: Home Equity, Equity Loan, Interest Rates, Equity Loans, Loan, Interest, Home
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