Home Equity Loans
There are many types of home loans, and a home equity loan is one of the most popular. This is a loan in which the borrower uses the equity in their current home as collateral. An appraiser from the lending institution will come assess your home and dictate its value, which in turn factors in how much the loan amount will be for. There are two primary reasons why people take out home equity loans: (1) to sell their current home and buy another, and (2) to get cash. The loan amount is a fixed sum determined by the value of your home and you repay the loan by making payments over a time period as you would your original mortgage. If you fail to repay the loan your lender can send your property into foreclosure. Typically, borrowers that opt for home equity loans are limited to 85 percent of their home’s equity. However, your income, the market value of your home, and your credit history also have an impact on the loan amount. The best thing you can do is pick up as much education on this loan type as possible, and find out common questions people ask about home equity loans so that you can get a bigger picture of how this home loan works, and if it is your best option. Write down a list of any questions that might spring to mind. Then call our team at Diditan Financial team; we are standing by to help you find the best home equity loans to meet your needs.
Home Equity Loans Terms and Conditions
Our Diditan Financial experts will explain the various loan opportunities out there, and recommend the best one to meet your needs. It is vital you understand the terms and conditions , as just knowing the monthly payment amount and the interest rate is nowhere near enough. The annual percentage rate (APR) for a home equity loan will consider all financing charges and points. We will explain any fees which generally include the underwriting fee, loan application fee, lender fee, document preparation fee, broker fees, appraisal fee, and origination fees. You will also want to note if there are any interest rate add-ons, and if more fees surface you will pay more money to finance them. At Diditan Financial we will go over your credit score with you to shed more light on your options regarding various terms and conditions. Credit scoring is vital here because lenders use it to determine whether or not to give you credit, and if they approve you, they must determine how much credit to extend. They will look at things like the type of accounts you have, the number of accounts, your bill-paying history, collection actions, outstanding debt, late payment, and the time in which you had these accounts and actions. Your profile will then be compared to the profiles of others in the same general standing through a database in which a credit scoring system administers points based on who is likely to default and who is predicted to pay the loan when payments are due.
What is HELOC?
Your home equity line of credit, also known as HELOC, is a line of credit with a revolving pattern much like that of a credit card. You are in full control of how much and when you can borrow by using a credit card or writing checks connected to the account, but you can’t exceed your credit limit. You only make payments on the amount you borrow versus the full sum available to you. Ask our Diditan Financial experts to explain the benefits of HELOCS, as many award various tax advantages that others are not able to qualify for through different loans.
Your HELOC uses your property as loan collateral. Before you commit yourself to the loan you will want to make sure you can pay it back with no complications in order to avoid the risk of your home being foreclosed on for non-payment. You will also want to be aware of any balloon payments–a large lump sum due at the end of the lending phase. A balloon payment may require you to borrow even more money to pay off the debt, or you may fail to qualify for refinancing. These are things you should be fully aware of before committing to HELOCs, and our Diditan Financial experts have a wealth of experience in advising borrowers what to avoid and what is attractive based on individual portfolio needs.
What is the Difference Between a HELOC and Home Equity Loan?
Quite commonly, people mistake these financial vehicles as being one in the same. People also tend to view both as being a second mortgage. However, they are completely different, and their diversity is more apparent when one considers how both can impact a credit score. Here are the differences: a home equity loan is granted to the borrower in one lump sum with a predetermined rate that remains fixed throughout the course of the loan’s period. This is the type of loan most commonly, and correctly, thought of as a second mortgage. On the flip side a home equity line of credit (HELOC) behaves like a credit card and allows borrowers to draw from its available line of credit. HELOCs can, much like a credit card, have positive or negative repercussions to your credit.
How HELOCs Affect Your Credit Score
HELOCs can have good, bad, and ugly impacts on your credit, depending on how you use them. Much like a credit card, as long as you make sensible charges and pay off the balance in time, your credit score will smile back at you. If you are late on a payment it will no doubt be bad, and if you default on paying the balance off, it will be all together fairly ugly once your new credit score is produced. Here are some scenarios where a HELOC can help your credit score:
Short-Term Liquidity – If you need immediate cash for an emergency, a HELOC can be an excellent way to get fast cash as opposed to high-interest cash advances from your credit cards, risking a dent being made on your credit score, or hiking up your debt-to-available-credit ratio.
Paying Off High-Interest Rate Credit Card Debt – If you are drowning in high-interest credit card balances you can improve your credit by using a low-interest HELOC to quickly pay it off, save significant cash in interest payments, and potentially improve your FICO score, depending on whether your HELOC is an installment loan or mortgage.
Just as a HELOC can help your credit score, it also has the potential to hurt it. Here are some examples where it can bite you:
The 50/50 Rule – If you get a HELOC line of credit that exceeds $50,000 then your use of the line is typically regarded as a second mortgage, and this can harm your credit score, whereas anything under 50 is viewed as a mammoth line of credit. In other words, if your HELOC comes in under $50,000 and your total available credit has an exceeding balance of 30%, your credit score will be held in a detrimental light.
A Credit History with Spots – If you have a checkered credit history with past due and skipped payments, you will likely meet an ugly impact on your credit score when you request a home equity line of credit, as you are taking on another debt. Credit bureaus consider such actions as taking on additional risks.
Your home is your single most important form of collateral. Borrowing money against it is a serious matter, and should you be unable to abide by the terms of your HELOC, your credit rating will get ugly, and fast. You stand to lose everything, including your home and your money. Diditan Financial has been advising borrowers on home equity lines of credit, and even when the conditions and terms look favorable, using caution is vital to protecting your assets. We are here to protect you and your investment; call Diditan Financial today, and let us measure your portfolio against a HELOC option.
Tips for Getting a Home Equity Credit Line
Before you sign your name on the dotted line, there are some things you really need to know regarding home equity credit lines. There is a lot of information to take in, and it can be rather overwhelming.
- Beware of Rising Interest Rates. There are lenders out there who dangle shiny attractive introductory discounted rates that will shoot up in due time. Be realistic with your future earning potential and don’t take on debt that you can’t handle. If you default on the payments, you can lose your home and destroy your credit. Make sure you get a home equity line of credit with a fixed interest rate and adjoining fixed payments.
- Be a Smart Shopper. The Internet is revealing; use it to compare terms, fees, and rates offered by credit unions, banks, and private lending companies. All of these offer home equity lines that can be night and day from one another. For example, our Diditan Financial team did some research and discovered, just after hunting for 30 minutes, that rates can vary from 3.89% to 4.91%. Also, some have annual fees and others don’t.
- Ask for Deals. Most people don’t know it, but often lenders will have deals they keep in their back pockets that they can play only when needed. Let the prospective lender know that you are looking for a deal where closing costs are paid and annual fees are waived.
- Know the Draw Period from the Repayment Period. During the first five to 10 years of your open credit line (known as the draw period) all you have to do is repay interest. Then the repayment period kicks in which can run anywhere from 10 to 20 years requiring you to pay back principal as well. This could come in the form of a balloon payment–one large lump sum that must be paid in order for the loan to be satisfied. Make sure that you prepare ahead by ensuring you will have the liberty to refinance during the repayment period, if necessary, as unforeseen financial hardship can happen to anyone. Finally, make sure you know the full length of these two periods, and that you have the financial means to pay off the loan in the end. Setting aside a contingency in the event of an emergency is a smart play, if it is one you can make.
- Safety Check that Safety Net. Have you ever been skydiving? If so you know that it is routine to have your chute inspected multiple times before you don it and take that leap. If you are opening up a home equity credit line solely as a safety net in case your earnings go down, or if your son announces during his senior year in college that he changed his major and has another three years left of college that needs to be paid for, make sure there are no minimum draw requirements. If there are, you will have to pull money even if it isn’t needed and pay the interest.