Carrie Reeder asked:




When you apply for a home equity loan, lenders consider your creditworthiness when deciding whether or not to extend a loan. Your creditworthiness is assessed based on three things: credit history, income, and loan-to-value ratio.

Credit History

As with any loan, your credit history will have a major effect on home equity loan availability and loan interest rates. Fortunately, qualifying for financing on a home you already own is much easier than qualifying for a new home loan. If you have good credit, you should have no trouble qualifying for a home equity loan. You should also be able to obtain a relatively good rate. If you have bad credit, you should still be able to obtain a home equity loan, but your rate will probably be a bit higher. Before applying for a home equity loan, take time to pull your credit report. If possible, improve your credit rating by removing mistakes and old debt.

Income

Even though the equity that has built up in your home belongs to you, lenders will still want to make sure that you can pay back any amount that you borrow. To determine your ability to repay, lenders will assess your monthly income and your total debt-to-income ratio. (Debt-to-income ratio is a term used to describe how much of your monthly income goes towards paying your mortgage, credit card debt, loan installments, and other financial obligations, including the home equity loan for which you are applying.) Most lenders will want to make sure that your total debt does not exceed 38 percent of your monthly income.

Loan-to-Value

The loan-to-value ratio is the amount you owe on your house versus the amount your house is worth. For example, if your house is worth $100,000 and you still owe $70,000, your loan-to-value ratio is 70 percent. When you get a home equity loan, the value of your home is re-assessed. The lender will add your current mortgage balance to the requested home equity loan amount, and divide the sum by your home’s current value. The final amount is the new loan-to-value ratio. Many lenders want to keep this amount below 80 percent. However, some lenders are willing to loan you 100 percent of your home’s value or more. Here is a list of recommended Home Equity Lenders online. It’s important to use a reputable lender online to make sure your personal information is secure.

Dan

David Gass asked:


While on the look out for your dream home, you might have come across the terms “equity” and “home equity loans.” Below is an explanation to help you understand these terms.

What Is Equity?

Suppose the value of your home is $200,000 and the mortagage value is $50,000. The equity value of your home is $150,000. Equity is the difference between the value of your home and the mortgage balance.

Home equity loans have lower interest rates that are not subject to tax. Hence, it has become the most preferred option for home buyers. People use home equity loans in case of big expenses like weddings and home renovations. However, you should be careful, since you’re putting your home up as security. If you fail to pay it back, you may lose your home.

It is not advisable to take equity loans for paying off your credit card dues, especially if you cannot refrain from indulging in extravagances, as this will lead to more debts.

Types of Home Equity Loans

Home equity loans are of two kinds:

Traditional home equity loan or second mortgage: The bank provides a substantial amount of cash that you must pay back over a period. Here, interest starts right on the day the bank gives you money.

Home equity line of credit: The bank offers a credit card or a checkbook for purchases. This is collected against the equity of your home. Here, interest starts only after you make a purchase.

Paying A Home Equity Loan

Home equity loans can be paid in many ways. Usually, people pay them by making regular payments under the interest as well as the principal. In some loans, you have the flexibility of paying only the interest initially. Then there are loans that give you an option of getting rid of the principal faster by paying some extra amount. However, it is better to check out this option with your lender, as there are some loans that fine you for paying ahead.

How To Find A Home Equity Loan

It is wise to go to a bank that is different from the one that has your frst mortgage. Always do some comparisons before making the final decision, in order to get the best interest rates and terms on the loan.

Most home equity loans have different interest rates. Some of them come with a fixed interest rate while others have small introductory rates. Certain loans come with high closing costs and annual charges.

Then there are loans featuring huge balloon payments. Others have no balloon payments and come with large monthly payments.

An After Thought

Finding the best home equity loan requires some effort, but it is rewardig at the end. It can help you pay off debts or acquire money to start a new business venture.



LOUIS

Alan Lim asked:


Home equity loan and refinancing are two excellent ways that can help you manage your finances. However, it may prove difficult to choose one from the other and should depend on what your financial goals are. You can opt for the lower payment schemes of cash-out refinancing, or you can choose the great tax benefits offered by a home equity loan. The choice, however, does not prove to be as simple as this. Here is a comparison of these two types of loans to help you see which one is right for you.

Cash-Out Refinance Loan

Cash-out refinance simply means that you are refinancing your existing mortgage in order to lower your monthly payment and/or your current interest rate, and get some additional cash for other pressing reasons such as for home improvement, renovation, and the likes. If you are lucky to choose the right timing, you may be able to get all these with cash-out refinancing. Say, your home is valued at $300,000 and your existing mortgage balance is $200,000, your home equity remains at $100,000. You are free to borrow the remaining equity as you deem necessary.

Home Equity Loan

Home equity loans are usually provided in two kinds: the home equity line of credit and the home equity installment loan. A home equity line of credit line means that you are borrowing against the value of your home; your home is your collateral to the credit. Home equity plans are usually set at a fixed time; say 10 years but with variable loan rates. Your interest rate and the annual percentage rate of your mortgage can move up and down depending on the market trends. During the specified time, you are free to obtain the cash when you need it, and pay only for what you happen to spend. Some mortgages are offered with payment of full outstanding balance, while others allow repayment over a fixed time.

On the other hand, an installment loan is a loan that has a fixed rate that stays the same all throughout the rest of your home equity loan terms. Also called the closed end home equity loan, you amortize your loan for periods lasting up to about 15 years. In this kind of home equity loan, you usually receive a lump sum at closing depending on your home value, and you can not borrow further afterwards.

Which is better?

Remember that interest rates do not usually behave normally, much as you want them to. When this happens, home equity loans may actually prove cheaper than refinancing, although they are potentially riskier. Choosing what is better between the two should depend on individual circumstances. For example, if you plan to pay off your mortgage and do not need as much money, you can go for a home equity loan to get lower rates and shorter terms. On the other side of the fence, with cash-out refinancing, you can get all your money up front and simply pay off interest and principal on a lowered monthly basis as agreed upon, with no frills. Weigh carefully based on what your financial objectives are and choose one which you think will give you a fairer deal.



NICK