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Home Equity Loans – Basics

Home equity loans have become increasingly popular in the past few years. With property values rising, more people have realized the benefits. They allow you to borrow a certain amount of money, using your home’s equity as collateral. Collateral is property offered to a lender as security for the loan. It gives the lender a guarantee that you will repay the debt, because if you did not, the lender could sell your property to get the money they lent you back. Equity is the difference between how much the home is currently worth and how much is owed on your mortgage. Home equity loans may seem complicated but they are actually quite simple. You just need to understand a few terms and concepts.

What is a Home Equity Loan?

A home equity loan is a second loan on your property that gives you money based on the amount of equity in your property. You can spend it on anything you want. Most people use it for home improvements, debt consolidation, college educations, vacations or car purchases. The interest that you pay on your home equity loan is typically tax deductible-and that is a huge benefit to this loan. Consult your tax advisor regarding the deductibility of home equity loan interest.

What’s the difference between Home Equity Loans and Lines of Credit?

There are two ways a lender can loan you money based on your home’s equity. First is a home equity loan which is based on a set loan amount, and second is a home equity line of credit, also known as a HELOC, which is a revolving line of credit. Both are referred to as second mortgages, because they are secured by your property, behind your first mortgage. With home equity loans, you apply for a set loan amount and pay it down based on a fixed interest rate. The maximum amount of money that can be borrowed is determined by several variables such as your credit history (FICO score), income, first mortgage and the recent appraised value of the collateral property.

How much can they loan to me?

The relationship between your loan amount and your home’s appraised value is called the “loan-to-value” ratio, or “LTV”. As LTVs increase, the interest rate of the loan in question usually increases as well. (“Home Equity FAQs”). The maximum amount the lender loans is partially determined by this ratio. The maximum LTV varies per lender. Note that if the LTV is too high, it could affect your approval, interest rate or conditions due to the increased risk for the lender.

Can I get an equity loan on my rental property?

Home equity loans can be taken out on primary residences, second homes, investment properties and vacation homes. However, each property has individual conditions for approval. It is also more difficult to qualify. This is due to the increased likelihood of defaulting. Underwriters prefer applicants with better credit and more assets than they do with applicants purchasing their primary residence.

What if my income is too difficult to determine?

If you have difficulty providing all the income documents necessary for the loan, you can apply under special loan programs such as stated income, “no doc” or “low-doc.” Applicants who are self-employed or commission-based use them often. People who do not want to share their financial history and complicated tax returns with a lender fall into this category as well.

Can you refinance your mortgage with a home equity loan?

If the interest rate or mortgage payment on any property is too high, a home equity loan is also a good way to refinance your existing mortgage loan, take some additional cash and make one easy monthly payment (“Home Equity FAQs”). Refinancing is the process of adding a new first mortgage to replace an existing first mortgage and any other liens you may have. There are two ways to refinance: no cash-out and cash back. No Cash-Out refinancing reduces your monthly mortgage payment and the remaining term of your loan. It can help you save thousands of dollars in interest. Cash back refinancing allows you to borrow money in excess of what you currently owed on your mortgage. You still reduce your interest rate and term, but you also get a hold of the money you earned when your property’s value increased. Cash back refinancing is a smart decision if you have future expenses that will need financing. If you need a new car, you could take an additional $30,000 and add that amount to your loan. The interest rates will likely be lower than your credit cards or car loan, and again, the interest you pay can be tax-deductible.

Refinancing with a home equity loan is similar to refinancing with a traditional mortgage. The main difference is that equity loans are typically repaid in a shorter time than first mortgages. Traditional mortgages are usually repaid over 30 years. Equity loans often have a 15-year repayment period, although it might be as short as five or as long as 30 years (“Home Equity Credit Lines”).

Now that you are familiar with some basic home equity loan terms and concepts, the process should seem straightforward. When you need money, obtaining a home equity loan not only simplifies your life, it also saves you money. It gives you piece of mind through the fixed low interest rate and low monthly payments. The process only takes several days and the funds are transferred into your bank account upon the loan’s closing. It is as easy as pie.

A General Guide to Home Equity Loans

A home equity loan is a loan that is available to homeowners. In the most basic sense a loan is a sum of money that is borrowed by a person or company and then repaid, with interest (a percentage of the loan amount, usually calculated on an annual basis), over a set period of time. Two principal parties are involved in loan transactions: a borrower (the party borrowing the money) and a lender (the party lending the money).

The two basic types of loans are secured and unsecured. In obtaining a secured loan the borrower presents the lender with some piece of property (for example, an automobile), of which the lender can claim ownership in the event the borrower fails to repay the loan (also known as defaulting on a loan). This property is known as collateral. Unsecured loans, on the other hand, do not require the borrower to have collateral. A home equity loan is a form of secured loan, in that the borrower uses his or her house as collateral to secure the loan. People take out home equity loans for various purposes, such as undertaking home improvements or paying off debt (something-for example, money, a piece of property, or a service-that an individual owes to another individual or an entity).

In almost all cases a home equity loan will represent the second loan a borrower secures using his or her house as collateral. Because houses are very expensive, most homebuyers must first take out a loan to purchase a house. These home loans (commonly known as mortgages) are for large amounts of money and are repaid in monthly installments over a long period of time, typically 30 years. As time passes the value of the home will usually increase (a process known as appreciation), while the total of the mortgage that remains to be paid gradually decreases. The difference between the value of the house and the amount remaining on the mortgage is known as equity. Put another way equity represents the amount of money a homeowner is able to retain after he or she sells the home and pays off the remainder of the mortgage. For example, say a couple purchases a home for $200,000. They pay $20,000 up front (known as a down payment) and then take out a loan for the remaining $180,000. On the day they complete the purchase of the house (also known as the closing), the couple has $20,000 in equity (in other words the original down payment). Two years later their house is valued at $220,000, and the amount remaining on their mortgage is $176,000. In this scenario the couple would have $44,000 in equity on their home. With home equity loans the amount of money a homeowner can borrow depends on the amount of equity he or she has in the house. Traditionally this type of home loan is referred to as a second mortgage.

The two basic types of home equity loans are closed end and open end. A closed-end home equity loan involves a fixed amount of money; the borrower receives the entire amount of the loan (known as a lump sum) upon completing the loan agreement process (or closing). Closed-end home equity loans usually have fixed interest rates (in other words the interest rate remains the same for the life of the loan). Typically the amount of the loan will depend on the amount of equity the borrower has in his or her house; the loan amount might also depend to some degree on the borrower’s credit rating (in other words whether he or she has a proven record of paying off debts in a timely manner). In most cases a borrower is able to borrow up to 100 percent of the equity he or she has in a house. When economists talk about second mortgages they are typically referring to closed-end home equity loans.

With open-end home equity loans, on the other hand, the borrower does not take the lump sum of the loan amount all at once. Instead the borrower receives the loan as credit (that is, as a maximum amount of money he or she can borrow), which the borrower can use as desired. This type of home equity loan is commonly referred to as a home equity line of credit (HELOC). The borrower can take money out of a HELOC at any time and is only required to pay back the amount he or she actually uses. A HELOC is subject to what is known as a draw period, during which the borrower is entitled to borrow money, up to the total amount of the loan, whenever he or she wants. In this way open-end home equity loans give the borrower a greater amount of flexibility. Most open-end home equity loans have variable, or adjustable, interest rates. These rates tend to change over the life of the loan.

Reaping Financial Rewards – Bad Credit Home Equity Loans

Home is the place you inhabit. It is the place where you live, breathe, grow, thrive. It does more than just providing a living space. The moment you build up this house, or moved to your present apartment, you did not realize that you have struck it rich. ‘Rich’ – that is not the exact word to define your current status as you are struggling with bad credit. I know you want to argue on this point but let me explain. There is something called home equity that lies in the embryonic state waiting to be germinated. Home equity has more to it than what meets the eye. However, many of us do not understand the meaning of home equity. Let alone use it for their own prosperity.

Let us begin with the fundamentals. Home equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have more than one on the property). A home equity loan or line of credit is a loan that facilitates the borrowing of money using home equity as collateral. A home equity loan is in essence a secured loan. Accordingly aborting the repayment agreement will result in seizure of your property or home. That you certainly don’t want since you already have been suffering due to bad credit. Confiscation of your property is the one thing you don’t want on your list of financial fiasco. Thus careful introspection is recommended in relation to bad credit home equity loans. A key word that might be encountered by you is home equity line of credit. It is categorized as the kind of home equity loan. A HELOC or home equity line of credit allows the loan borrower to borrow various sums up to a fixed amount over a period of time. A home equity line of credit works in a way which is analogous to a credit card; you use it when you need it. Different States set their own laws on limits you can borrow against your house.

Bad credit home equity loans can be used for any personal reason. Bad credit home equity loans are second mortgage that converts your home equity into ready money. This cash can be used for many purposes like home improvement, debt consolidation, college education, and any other expenses. There is no expiration to possibilities to a home equity loan. Tapping on the home equity with bad credit is effortless if the loan borrower understands his own expectations and status in the context of bad credit home equity loans. Bad credit home equity loans are currently very attractive but then again you what is good for someone else might not be good for you. So bad credit home equity loans should be contemplated seriously before taking a concrete decision. You don’t need another bad decision on your credit report, so chose wisely.

Bad credit has unwelcome consequences on your entire investments plan. This includes your plans for taking a home equity loan. You might have blundered earlier but this time it is our home which is at stake. Discuss your bad credit with the loan lender you are opting for. Commissioning the right loan lender is crucial for your bad credit home equity loan. In fact it is the thing that guarantees your success in acquiring bad credit home equity loans.

Little do people realize that home equity is a powerful tool for making a statement while placing a loan application. Bad credit home equity loans have a very high incidence of being the finest option of people contemplating debt consolidation. You success with bad credit home equity loans rests on the simple fact that you make a plan and cling to it religiously. The credit card debts have been weighing heavily on you. Those irksome little debts, those just hamper your personal expenditures in every possible way. Get rid of them this time with bad credit equity loans. Let you wallet weigh less of credit card debts and more of ready cash for you personal usage.

Bad credit home equity loans have this great opportunity for home owners. Bad credit home equity loans can be used fittingly for the purpose of home improvement. Make the minor little changes that you have been putting off due to this bad credit. There is an added benefit. You build up your equity while using equity for in your home. Bad credit home equity loans can even help to fund your vacation. Clasp the snow stricken mountains, or go for a dip in the clear blue waters of the Caribbean islands. It can all be realized through home equity loans even if you can’t shed off the bad credit tag.

A very congruent utilization of bad credit home equity loans is for initiating a retirement plan. Retirement is to be realized some day. A lot depends on how you are planning your retirement that will reflect on your financial independence in the future. Many bad credit home equity loans have been used to proffer investments. A trusted loan lender or financial advisor can advice you suitably for your current financial status. Make a bad credit home equity plan and see how it can reap economic rewards.

Economic rewards! Does that come with bad credit? You are throwing your hands up in the air and saying ‘no way’. ‘No way’ but you have read all about it. Haven’t you? You see the house you are standing on, now see the four walls surrounding it. Yes this house, your house that you own. There is a gold mine hidden there in terms of home equity. And you were searching the road to Eldorado.