Know everything that you need to know about a home equity loan

Learning all about home equity loans will allow you to make good choices and decisions. So, in order to get the best deals, you have to actually know what a home equity loan is. 

Home equity loan (HEL) is different from mortgage loans and refinancing loans. Note that this is the kind of loan that you will get when you use the equity of your home as the collateral. 

To add to that, you have to keep in mind that when you get a home equity loan, you will not increase the original mortgage amount that you borrowed. Instead, you are getting a second mortgage. This means, a second mortgage demands a different payment from that of the first one. So, you will have to pay two mortgage bills every month- one is for your original mortgage loan, while the other one is for your home equity loan.

Another thing that you have to know when picking a home equity loan is the basis of its interest rate. Note that home equity loans usually have higher interest rates than that of your mortgage loan. This is because of the fact that a second mortgage is considered riskier that the first one. 

Realize that your credit score matters 

Despite the fact that most lending companies offer a higher interest rate when it comes to home equity loans, you need to understand that your credit score will still affect the rate that you will get.

Generally, a credit score indicates your capability to pay for the money you are borrowing. It serves as the lending company’s ultimate gauge for your creditworthiness. As such, the higher your credit score is, the more credit worthy you are deemed to be. And as a result, the more “creditable” you are, the higher are your chances of getting a lower interest rate on your second mortgage.

If you have a good credit score, then go ahead and get your home equity loan right away. However, if you are suffering from a low score, make it a point to fix your credit record first before you make a move in applying for an equity loan.  Keep in mind that the only way to get a good deal is to provide a good credit track record as well.

Explore your choices

Avoid plunging into the first home equity loan offer that you see. Getting a good deal requires you to look for the best options that are available. Inquire about home equity loans from credible lending companies and get quotes on their loan package such as their interest rates and the service fees that they charge.

Also, be aware that while you are shopping around, most interest rates for home equity loans are not fixed. Almost everything is negotiable now. So, do try to negotiate about the home equity loan packages that you are planning to get.

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Do not mix up home equity line of credit with home equity loan. While both are secured by your home, it can best be differentiated through the payment system. Once paid, a homeowner can no longer borrow from the loan when he or she chooses the home equity loan. On the other hand, the homeowner has the advantage of using the loan again once it is paid within the time limit given by the creditor.

A home equity line of credit is advantageous for homeowners who are experiencing financial difficulties. Others view HELOC as a dependable means to support their lifestyles and other monetary needs.

While home equity line of credit is beneficial and very much tempting for homeowners to avail, you should always think twice and consider the best possible ways to maximize your HELOC. Otherwise, you might one day regret availing your home equity line of credit at the wrong time.

So, when is the best time and what are the best ways to use your home equity line of credit? Here are 5 ways to use your home equity line of credit and enjoy the power of this financial solution using your home’s value.

1. For home renovations

If you are not really in a tight financial mess, a home equity line of credit is highly recommended to finance your home renovations. Making use of your HELOC is a smart technique to further increase the value of your home.

So when unexpected circumstances occur demanding for a huge financial source, HELOC will work once again to your advantage. However, plan for your home improvements. Research and go for the most recommended add-ons to your home to further increase the value of your home. Adding a new room or remodelling a certain part of the house usually maximizes its value.

2. To pay off debts

You might have failed to protect your good standing as a debtor that resulted to a huge amount of debt. The home equity line of credit may be your financial source to pay off your outstanding debts and prevent them from accumulating due to high interest rates. But once paid off, be sure to remind yourself not to plunge again into debts or you might just end up losing your home as well.

3. To set up a small business

Another smart way is to use your HELOC to set up a small business. However, ensure that you have a clear strategy of what your business will be and that you have a strong knowledge on how it will generate income. Otherwise, you might end up just wasting the money from your HELOC.

4. Save in a bank

You may also opt to use your HELOC to save money for emergencies. Deposit it in a bank which offers higher interest-earning products. This way, your borrowed money is also earning interest and you can immediately withdraw from the bank when the need arises.

5. For the education of your kids

Your home equity line of credit can help secure your children’s future. You might face increasing financial difficulty in sending your kids to school, so your HELOC is a welcome answer.

Look for the best plans when applying for a home equity line of credit. Several HELOC plans are available now and you can check them yourself online. Always remember that it is your home at stake. You wouldn’t want to be in a financial and homeless mess, would you?

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With equity loans, you tap into the value of the home and place the home as collateral for the loan. Equity is the value that you have in your home computed by market value minus what you owe on the home.

It is wiser to get an equity loan rather than go for consumer loans. Home equity loan interests are tax deductible and the homeowner has several options when getting a loan.

A homeowner must remember though that equity loans are against the mortgage. Non-payment of the loan can lead to someone losing his home.

Types of Equity Loans

The most common equity loans are the home equity loan and the HELOC or home equity line of credit. Here are the main differences:

• Equity loan – This loan involves a closing cost and is given in lump sum. The interest rate is often fixed for the life of the loan and  is also tax deductible
• HELOC- Closing cost is not an issue for HELOCs. The money is dispersed as desired by the borrower. The interest paid is also tax deductible but the rates may vary according
  to market trends.

There are other options like taking a hybrid HELOC or equity loan, piggy backing, reverse mortgage, cash-out refinancing.

• Hybrids are variants of HELOCs and equity loans. The terms highly vary and it is advisable to consult the lender for the exact terms of the loan. 
• Piggy banking is taking concurrent first and second mortgage usually to avoid private mortgage insurance in place of a down payment. Usually, the first takes 80% of the loan and the rest is for the equity. 
• Reverse mortgage is designed for the elderly population and enables them to tap into the equity of their homes right now. 
• Cash-out refinancing is redrawing a larger refinancing amount against the home. It will be wise to take this loan if you are getting a lower interest rate, shorter loan term, and if the loan can roll in the closing cost so you don’t have to shell out cash.

What to Do Before Borrowing

If you are decided to tap into the equity of your home, here are some reminders that may help you out:

• Financial Adviser- You may consult financial advisers to make sure that you are entering a right deal. They can help you assess your current situation and advise which will be the best way to go.
• Compare and Shop- Homeowners may consult their primary lender and see if they can offer something better. Shop around different lending institutions to see which one can give you the best deal that can save you hundreds or even thousands of dollars. 
• Know the Terms – HELOCs for example are published with teaser rates that increase as the loan matures. It is best to know the details of the terms of the loan. Remember that a delinquent loan may lead to losing your home. 
• Know your Borrowing Rights- The federal government has required lenders to fully disclose the terms of a loan to a borrower. This includes the interest rates, closing costs, pre payment, etc. There is also a law that allows you to cancel a loan within three days. This is known as the right of rescission.

The rule of thumb for taking out loans is to know the right reasons for that loan and knowing how to fulfill your responsibility of paying it back on time.

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