MONEY AND FINANCE

Home Equity Loan – The Inner Secrets

Home Equity Loan – The Inner Secrets

You probably have heard the advertisements touting home equity loans as being the solution to your problems. You know, home repairs or improvements, debt consolidation, family emergencies and some ads go so far as encourage you to use a home equity loan to start an investment portfolio.

Good gosh, that certainly is a bucket full to think about especially if one or more of those scenarios describes your particular situation. The truth behind the home equity loan is that is akin to a second mortgage on your home.

Here is what it looks like in mathematical terms. Assuming your house is worth $150,000 and your first mortgage is $70,000, you have $80,000 in equity available to you. Can you borrow all $80,000 as a home equity loan?

The answer is a resounding maybe. For our sake, let’s say you can only borrow 80% of your equity. Keep in mind some lenders only allow you to borrow 80% of your home’s value.
If you can borrow 80% of your equity, in our case $80,000, you can borrow up to $64,000. But, if you can borrow only 80% of your home’s value, your home equity loan will be for 80% X $150,000 or $120,000 less the first mortgage of $70,000 for a total loan of $50,000.

This means you absolutely must know what the home equity lender’s formula is before you apply for a loan. 80% is 80% no matter whose formula is used. However, 80% in one scenario is worth more than it is in the second scenario.

At this point, you find a lender that suits your situation. It is important you don’t go overboard and borrow the maximum just because it is readily available to you. You have to keep in mind a simple fact. The more you borrow, the more it will cost you in repayments.

Before you charge off into the home equity loan arena, you should know two types of home equity loans exist. The first is called a closed end loan and the second is called a line of credit.

A closed end loan resembles your everyday standard home mortgage. This means you borrow a certain amount of money for a set period of time and make payments over time to methodically pay off the balance.

A line of credit, on the other hand, is like having a credit card with a giant limit. You don’t have to use the entire amount, but if you so decide, it is there for you to use. Repayments vary by issuer so know and understand your loan’s repayment terms.

Regardless of which loan type you select, the loan will only be for a set period of time. At the end of that term, you will either have to extend the time period or refinance the loan with another lender. At this juncture in your loan’s life, fees will be assessed and their amount will be based on your decision.

Tow more factors come into play in the inner secrets of home equity loans. First and foremost, before you sign on the dotted line, check for fees. Read all loan documents thoroughly before signing.

You also need to be sure you understand every paragraph because the loan company certainly knows them inside and out. Your lack of knowledge has the potential to cost you a lot of money. If the contract is not being explained to your satisfaction, tell the lender you want your legal advisor to review it.

Should they balk, you may want to walk away from this company. It is your right to have your legal advisor review and make recommendations on any and all financial contracts in which you have an interest.