If you are looking to borrow money using your home as collateral understanding home equity loans is of importance. Using your home equity allows you to borrow money while at the same time allows your lender to lend you money safe in the knowledge that it’s secure.
The amount you can borrow from a home equity loan vary depending upon your credit history, income, and the value of your home. Depending on the lender, you can borrow up to, and sometimes beyond, 100% of the appraised value of your home.
Types Of Home Equity Loans
Home equity loans are basically a second mortgage and there are typically two types – the fixed rate and the line of credit.
1. The first type of of loan is called fixed rate or close-end and it gives you a lump sum that you need to pay back over a period of time. Here the interest rate is fixed for the life of the loan, usually around 15 – 20 years.
The advantage of this is that you don’t have to worry about your interest rate changing. The disadvantage is that should interest rates fall yours will still be the same.
And depending on the lender, you may also need to do a balloon payment at the end of your loan’s term.
2. The second type of a home equity loan is what’s called the home equity line of credit or HELOC.
Unlike the first type above, you don’t get a lump sum but rather a line of credit, much like a credit card, wherein you can “draw” money up to the total credit limit calculated.
Interest rates on these types of HELs are often variable, meaning that the lender can change it month to month based on an index, usually the prime rate.
Why Get A Home Equity Loan?
1) A home equity loan typically has lower interest rates. Since you have collateral involved such loans are secured, enabling lenders to pass the lower risk to you in the form of lower interest rates.
2) Interest paid on these types of loans are tax deductible. If you use the money on home improvements you may be able to deduct up to one million dollars. At the very least you can deduct interest up to the first $100,000 you borrowed.
3) At the same time it’s easier for you to qualify for one even if you have bad credit and; get a relatively large amount at that. It’s because you’re using your home as collateral.
However, be warned that by using your house as collateral puts it at risk of being taken away from you should you default on your payments.
Basically, you’re giving away your rights to your home in return for the money you borrowed. The bank or lending institution has rights to your home same as you.
Negotiate and Compare Before You Sign.
You can get a better deal with better terms if you come prepared and ready to negotiate.
1. Compare lender offers first. Visit lender sites and ask for quotes. Better yet go to sites that give you quotes on a number of lenders at the same time. Lendingtree is one such site.
2. Negotiate with the lender. Ask them to either: a) lower the interest rate, b) waive or reduce one or more fees, or 3) lower the points.
Also pay close attention to the terms of payment, length of payment, as well as its flexibility.
You lose nothing by asking your lender to give you better terms than the original ones offered.
Finding the best HEL and rates can be tedious work. Make sure you’re informed before deciding on which loan to apply for.
