Julian Lim asked:


A discussion of the nature, benefits and operational methods of a home equity loan in simple, easy to understand language is helpful in deciding whether or not such a home equity mortgage should be acquired.

A home equity loan or home equity mortgage is an effective second mortgage on your home, taken out after you have developed some equity in your home. For example, if you purchase a home for $200,000 and you have paid $40,000 over the years against the loan principal and the market value for the home is now $250,000, you now have equity in the home of $90,000. Theoretically, you could apply for a $90,000 loan against the equity, but in practice, most lenders prefer to keep the loan at 80% loan to value or, in this case $187,500. In this example, a loan for $27,500 could be approved.

Definitions

Some of the definitions that you will need to be familiar with include equity, mortgage, interest rate, loan fees, loan type, principal and amortization. If you don’t understand the meaning of these words and others insist on an explanation from the loan broker or lender. You can also do the research yourself so that you are certain you understand the difference between an ARM and a fixed rate loan and why you should choose one or the other, depending upon your circumstances. There are some very good primer level books and classes on almost any subject you can name out on the internet including that of a home equity loan.

Terms

In the case of a home equity mortgage, the word ‘terms’ can mean ‘words’ or it can mean the length of time before the loan is paid off. A loan against the equity of your home often will have a longer term than a personal loan. You may see terms of 15 years, 20 years, even 30 or 40 year terms on the loan. Of course, the longer the term, the more money in interest you will be charged and the larger the percentage of funds you pay are for the privilege of using the money rather than for the money itself.

Rates

The home equity loan rates are also called interest rate or interest. Interest rates are usually structured in one of two ways, although there are other types of loans as well. The fixed rate loans set an interest rate up front and it remains in effect throughout the term of the loan. The adjustable rate mortgage loan has an interest rate that will vary according to a predetermined index or formula. For example the rate may be two point above prime rate, adjustable not more than twice every two years. These requirements will vary depending upon the economy of the time.

Advantages and Disadvantages

A home equity loan or home equity mortgage has the advantage of being a lump sum of money that you can use in any way you see fit–presumably legal. It has the disadvantage of increasing your debt loan and increasing the cost of money sometimes significantly. For example taking out was is actually a second mortgage on your home may raise your debt to value level to the point where private mortgage insurance is mandated by many lenders. This can add thousands of dollars to the repayment amount over the years.



KEVIN

Julian Lim asked:


  

A home equity loan or home equity mortgage is an effective second mortgage on your home, taken out after you have developed some equity in your home. For example, if you purchase a home for $200,000 and you have paid $40,000 over the years against the loan principal and the market value for the home is now $250,000, you now have equity in the home of $90,000.  Theoretically, you could apply for a $90,000 loan against the equity, but in practice, most lenders prefer to keep the loan at 80% loan to value or, in this case $187,500.  In this example, a loan for $27,500 could be approved.

 

Definitions

 

Some of the definitions that you will need to be familiar with include equity, mortgage, interest rate, loan fees, loan type, principal and amortization.  If you don’t understand the meaning of these words and others insist on an explanation from the loan broker or lender.  You can also do the research yourself so that you are certain you understand the difference between an ARM and a fixed rate loan and why you should choose one or the other, depending upon your circumstances. There are some very good primer level books and classes on almost any subject you can name out on the internet including that of a home equity loan.

 

Terms

 

In the case of a home equity mortgage, the word ‘terms’ can mean ‘words’ or it can mean the length of time before the loan is paid off.  A loan against the equity of your home often will have a longer term than a personal loan.  You may see terms of 15 years, 20 years, even 30 or 40 year terms on the loan.  Of course, the longer the term, the more money in interest you will be charged and the larger the percentage of funds you pay are for the privilege of using the money rather than for the money itself.

 

Rates

 

The home equity loan rates are also called interest rate or interest. Interest rates are usually structured in one of two ways, although there are other types of loans as well.  The fixed rate loans set an interest rate up front and it remains in effect throughout the term of the loan.  The adjustable rate mortgage loan has an interest rate that will vary according to a predetermined index or formula.  For example the rate may be two point above prime rate, adjustable not more than twice every two years.  These requirements will vary depending upon the economy of the time.

 

Advantages and Disadvantages

 

A home equity loan or home equity mortgage has the advantage of being a lump sum of money that you can use in any way you see fit–presumably legal.  It has the disadvantage of increasing your debt loan and increasing the cost of money sometimes significantly. For example taking out was is actually a second mortgage on your home may raise your debt to value level to the point where private mortgage insurance is mandated by many lenders.  This can add thousands of dollars to the repayment amount over the years.

 



CORNELIUS

Jill Murtha asked:


Real estate prices across the country have skyrocketed in the last five or six years. Low interest rates, combined with a lack of trust in the stock market has led to a tremendous inflow of capital into real estate. To put that in perspective, take into account the median household income, which is a little over 44,000,dollar and compare that with the national median home price of 216,000 dollar, a very high multiple. Of course, in many metropolitan areas ( http://www.ixs.net ) where a large fraction of the nation’s population lives, the rise has been even more spectacular. San Francisco has seen the median home price rise from 395,000 dollar in 2000 to 713,000 dollar in early 2005

For those who did not get in at the right time, the situation is lamentable, many others, on the other hand, find themselves sitting on potential gold mines - in many cases they have witnessed the doubling, trebling or even quadrupling of their investments in a matter of a few years. Walking and sleeping on land that has appreciated under your eyes is a satisfying experience, and some people are quite happy to count their chickens without wanting to cash-in on their gains. Others, for whatever reasons want to enjoy their newfound wealth. Home equity loans offer an opportunity to do just that.

The fact that property prices have risen means that more Americans than ever before are eligible for home equity loans. Let me illustrate that by an example - say you bought a home for 300,000 dollar five years ago, putting down 20% (60,000 dollar) at that time. If you have a typical thirty-year fixed mortgage then you have not made a significant dent in the principal (in this case the loan principal is 240,000 dollar) in the first five years. Now suppose, quite realistically in many cases, that the house value has appreciated from 300,000 dollar five years ago to 500,000 dollar today. In this case your equity in the house would have jumped from 60,000 dollar (your down payment) to 260,000 dollar (down payment plus unrealized capital gains). You would be eligible to take a loan against that increased equity. Most institutions are willing to extend home equity credit for upwards of 50% of total equity in the home.

Now that we have established that a rising real estate market has produced many more potential candidates for home equity lines of credit, let us show why this is a financially savvy way of consolidating loans or of securing financing. Whether the reasons are personal, such as Ferrari you have been drooling over, or for your home business, home equity loans are usually the best first option for obtaining liquidity. First, home equity loans take advantage of tax breaks that the federal and state governments give all homeowners - all interest payments made to service the loan are tax exempt.

This advantage alone warrants serious consideration - a family in the 30% federal income tax bracket will stand to save a substantial amount on a typical home equity loan. The implications of the tax advantage are such that many people with no need for additional credit take out home equity loans and invest elsewhere just so they can take advantage of Uncle Sam’s generous handout. Second, home mortgages are handled a little differently from other consumer loans because of two reasons. First, the loan is “secured” by a tangible asset (i.e. the house, comprising of the value of the land and the material with which the house is constructed) and second, there is a huge industry that deals exclusively with home mortgages and home loans, resulting in a fiercely competitive environment. To the consumer, this results in significantly lower interest rates on home loans.

So, let us recap the win-win situation for a home equity line of credit. Rising real estate prices have made more people eligible for bigger loans, in many cases significantly bigger loans than ever before. Relatively low interest rates, thanks to the Fed and a competitive home mortgage industry has kept the cost of borrowing low. And finally federal and state tax breaks on home loans further reduce the cost of borrowing.

If you are thinking of borrowing money and you are a homeowner, be sure to consider a home equity line of credit before pursuing alternative methods of financing.

For more information about Home Equity Loan visit http://www.loansmagician.com/home-loan.php



BILLY