Understanding home equity loans
If you are in debt or you need some quick cash to fix up your home, you can use a home equity loan to help. A home equity loan will basically release all the equity that is tied up in your home and provide you with some much-needed financial assistance. If you are struggling to meet your monthly payment obligations or you need money to buy a new car, consider a home equity loan. It is one of the easiest ways to get some quick cash to cover your expenses now.
There are two basic types of home equity loans, a standard home equity loan and a home equity line of credit (HELOC). Both loans will use the value of your home as collateral to give you the money you need now. The current market value of your home, minus you remaining payments will determine the equity that is left in your home. The longer you have owned your home, the higher your home equity will be because you do not have as many mortgage payments left to pay.
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A standard home equity loan
A standard home equity loan is basically a second mortgage. You will agree to a loan that will have a fixed monthly payment amount and a fixed interest rate. In order to be in compliance with the loan, you must pay back the amount you borrowed according to the terms set forth in the contract.
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What is a bridge loan?:
If you want to buy a new home, but you have not sold your old home, you can use a bridge loan to secure your new home. The bridge loan is basically used as a down payment on your new home. This can really help a seller if they need some quick cash while their existing home is up for sell. Lenders generally do not release funds on a home equity loan if that home is currently listed. In order to qualify for a bridge loan, you need to have a good credit rating. Lenders will take a look at your debt-to-income ratio and they want to see someone that can control their spending and is worthy of a loan. A lender will look at the long-term financing of your new home and determine if you are eligible for the bridge loan. A bridge loan is a little more expensive than a home equity loan, but it can really help you if you need some money now. Each lender has different standards and different rates when it comes to bridge loans. Once you sell your home, the bridge loan needs to be paid in full plus any interest fees and other fees. You will have around $2,000 in other fees which include appraisal fees, title fees, and administration fees. There is also a loan origination fee which is based off the loan amount. Bridge loans can be useful for home buyers because you do not need to make monthly payments for a couple months. You can also have access to this money immediately to use as a down payment on your new home. The largest downside to a bridge loan is the monthly payment obligations you are undertaking. Instead of having a single mortgage to pay, you now have two mortgages plus the bridge loan amount. This can be a financial burden for individuals that are un-prepared to come up with the money to pay for these loans. The interest rates and fees are higher, which could defeat the purpose of obtaining the loan if your home sells within a few weeks |
Your home will be used as collateral when you apply for a home equity loan. If you have a poor credit score, a home equity loan could be your ideal solution. Most banks are willing to give home equity loans out to anyone that has a decent amount of equity on their home. This is the perfect solution for anyone that needs to get some quick cash now. Home equity loans are considered safe because the bank will have easy access to your home if you default on the loan. Lenders have also found that their clients make their payments a priority when their home is on the line.
Home equity loans are also beneficial over personal loans and other quick-cash sources because they have a lower interest rate. The money you pay to interest is also tax deductible and you can get a fairly decent amount of money when you use a home equity loan.
Most people that use a home equity loan need the money to pay for expensive renovations to their home, college education, or to consolidate their debts. You can use the money for anything you need, just remember that your house is on the line if you use a home equity loan.
A home equity line of credit (HELOC)
A home equity line of credit is a little different than a home equity loan. It's a great way to get some quick cash, but you need to pay it all back in full once the draw period is over. Similar to a home equity loan, you can borrow against the equity that has been built up in your home. Your home will be the collateral for the line of credit and a bank has every right to repossess your home if you default on the line of credit. The bank will draw upon the fixed amount of equity and they will allow you to access fifty percent of that value.
Depending upon the lender you work with, you will need to re-pay all the money once the draw period ends or you can arrange monthly payments for a fixed amount of time. You will need to repay the money you borrowed, plus the accumulating interest costs.
If you need quick cash, a home equity line of credit is more flexible than a home equity loan. You only need to borrow what you need and you determine how soon you want to pay back the money you borrow. This could mean you can wait 5-10 years to pay back $15,000. As long as you stay below your maximum credit limit, you can go back and borrow more money during the designated time frame. A home equity line of credit also has a variable rate, which could mean you will pay less if the interest rates drop. The only downside is that you could end up with a high interest rate if the rates increase or if you start defaulting on your payments.
A line of credit has a draw period during which you can keep pulling out more money until you reach your credit limit. After the draw period ends, you need to start paying back the money. A line of credit does have closing cost fees attached to it. Depending upon the amount of money you draw out and your lender, you may want to reduce the amount you withdraw because you will pay more in closing costs.
A home equity line of credit is basically like a credit card. You borrow the money to purchase things you need, then you are expected to pay back this money plus interest. If you fail to pay back the money you borrow, your credit rating will drop and you can potentially lose your home or have it go into foreclosure.
Even with the downside of putting your home on the line, a home equity line of credit will have a lower interest rate from personal loans. This can potentially save you thousands of dollars on interest, if you know how to control your finances.
Finding a good lender for a home equity loan
Before you even start looking around for home equity loan rates, you need to obtain a copy of your credit report and score. Make sure you are an attractive client so banks will provide you with the best interest rates. Don't limit yourself to just banks; consider using a credit union or a broker to finance your loan.
If you are new to the home equity loan world, ask your close friends or family members for referrals. Normally the credible lenders come from a referral from a trusted source. Your family members and friends will let you know if they dealt with a deceitful lender or if they enjoyed their experience with their lender. Try using the internet to check for the best companies out there. You can find consumer web sites that discuss the lenders and if they are an honest and reliable company.
Once you have a few phone numbers ready, start looking around for the best rates and terms. If you aren't sure if you want a home equity loan or a home equity line of credit, ask the lender for a quote on both. Generally, a good lender will help you assess your current financial state and determine if a loan or a line of credit will fit your lifestyle. Ask several lenders for a Good Faith Estimate or a GFE before you agree to the terms with one lender. A GFE will not damage your credit score and it helps you compare at least 3-4 different estimates. Look for low closing costs and lower interest rates. If you like the terms laid out by one lender, but their interest rates are a little higher, bring in the GFE from the other lender. You can easily negotiate with a lender if they know you are in contact with their competitors.
Don't borrow more money than you need. One of the common problems individuals have with home equity loans and home equity lines of credit is that they get greedy. Since they are approved easily, they decide they might as well take out an extra $3,000 - $5,000 that they don't immediately need. If you are paying a high interest rate, you will lose more money by being greedy in the beginning. Be smart about your loan and only get what you need now. Remember, if you do need more, you can go back and restructure your loan or withdraw more from the line of credit. Predict how much money you will be making in the future so you can make sure you have enough money to cover your monthly payments. If you are unsure, borrow less or consider waiting until you have had time to take a look at your finances.
While home equity is a great way to get some quick cash, you need to remember that you could lose your home. A home equity line of credit is not like an unsecured credit card or unsecured loan. If you default, you could be homeless. If you don't think you will be able to pay on time, don't borrow as much money or use an unsecured loan.
Make sure you are getting the best deal out there for your financial needs. You may want to consider refinancing your mortgage for some quick cash instead of obtaining a home equity loan. The loan should be there to help you, not overburden you and put you into a worse financial state than you are already in. Always plan ahead and speak to 3 or 4 lenders before you make your decision.
