Archive for the ‘Home Equity Loans’ Category

What Makes Home Equity Loans so Attractive?

A home equity loan is a popular way to borrow larger amounts of money from a lending institution using your home as collateral. There are two terms that you should be familiar with when looking into taking out a home equity loan, they are equity and collateral. Equity is the amount of the money that your home is currently worth (appraised value), less any debt (mortgage).

Collateral means that when you take out a loan, you pledge something of significant value (in this case your home). Your home is a guarantee to the bank that you will pay back the loan. If you can not repay the loan, the bank can sell your home to recoup all its losses.

It is important to understand that putting up your home as collateral is a major reason why home equity loans are very attractive to lenders. Lenders find these loans very secure and because they are more secure than other types of loans they are able to give you extremely attractive rates. Usually home equity loans are at or a drop higher than normal mortgage rates. Plus in many cases, the interest paid for home equity loans are tax deductible.

Another reason home equity loans are attractive is that it allows home owners to borrow large sums of money, tens of thousands or even hundreds of thousands of dollars. You usually can’t borrow that much money on a credit card or other type of loan. For instance, if you would like to renovate your home, go on a vacation of a lifetime, send your child or children to college or even use it as an investment or seed money to put down on other businesses, home equity loans can empower an individual very easily.

Home equity is also attractive to many homeowners because the repayment schedule for many of these types of loans can be 5 years, 15 years or even 30 years. For homeowners that would like to borrow large sums of money, but don’t want to be burdened with large monthly payments, home equity loans make it very easy to budget monthly payments over a long period of time.

While home equity loans are extremely attractive loan products, it is important to make sure that they are right for you and your families specific circumstance. A home equity loan is essentially a second mortgage and if you are unable to pay these types of loans, you can literally lose your home.

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Filed under Home Equity Loans : Comments (0) : Aug 18th, 2008

Beware of Risky Home Equity Loans

While the majority of home equity loan products are not only good for the homeowners, but also for the lenders, there are many types of loans that use equity that can be high risk and in many cases fraudulent. Here are some tips to protect yourself.

As with all financial dealings, make sure you do business with a reputable company, or if the company is not known to you, research it by checking with the Better Business Bureau or other government agency’s.

Besides normal fraud, you should be aware of specific types of loans that can be high risk especially for those that are not healthy financially. They include balloon loans and high LTV loans.

Balloon Loans With normal loans, you pay both the principle and interest over the course of the loan (15 years or 30 years). However with a balloon loan, you only pay the principle throughout the course of the loan. The last payment of the loan however is the entire interest payment. While these loans have their purposes, specifically if you are not planning on living in a home for longer than the loan length, they can be extremely risky for those that do not have reserves. For instance, the last payment in many cases can be tens of thousands of dollars or more.

High LTV Loans LTV stands for loan to value ratio. It is the appraised value of the home compared to the amount of debt owned on a home. For instance, if your current home is appraised at $300,000, you have only $25,000 left on your mortgage and you would like to borrow $25,000 in a home equity loan, this would be viewed as a low LTV loan. However, some lenders allow you to borrow up to 125% of your home’s value. So a loan on a home worth $300,000 with a mortgage of $25,000 left, borrowing $300,000 would make this a high risk High LTV loan. The reason that it is high risk is that if the value of the home drops in price, neither the homeowner nor the bank would be able to recoup their loss on the loan. Read the rest of this entry »

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Filed under Home Equity Loans : Comments (0) : Aug 13th, 2008