A Home Equity Loan - What You Should Know?
By Dean Shainin |
Asking yourself, “Is a home equity loan right for me?” is the first and most
important step to take.
Home equity loans have become so popular today
because of increasing home values. A home owner can access money for
consolidating debt, home improvements, a new car, education or starting a new
business.
Emotions can take the place of logic when considering a home
equity loan.
It’s a good idea to sit down and take your time before
signing up. Educating yourself will benefit you in the long run.
A home
equity loan is like having a second mortgage on your home. Suppose your home is
worth $200,000, and you have a mortgage against it at $150,000, you will have
$50,000 of equity available. Home equity loans allow you to borrow up to 80%,
and sometimes more in certain situations, of your homes value. In this situation
you could borrow $80,000 as a home equity loan and still have only borrowed
80%.
This is why it is so important to take a good look at your situation
before making a decision. You can see how easy it could be to get carried away
with a home equity loan.
The second step should be to get an idea of what
your home is worth in today’s real estate market. You can look at what others in
your area have sold their home for. A realtor can help you with getting an idea
of your homes fair market value. Be sure to get a few quotes because some
realtors may be interested in inflating your home value in hopes of earning your
business.
When you have an approximate figure, you can get an idea of how
much equity you have in your home. At this point you should have an estimate of
how much money you need to borrow. It’s best if you can avoid borrowing up to
the full 80% of your homes value.
This is where some home owners get
carried away with their emotions and logic goes out the window. It can be so
easy to say, I have $60,000 available and I really only need $40,000 for
remodeling my kitchen and bathrooms. Why not borrow $50,000 so I can go on my
dream vacation. It’s important to remember that the more you borrow, the higher
your payments will be. This is simple logic. But, emotions can take over and you
can end up having a tough time paying back the home equity loan, with the risk
of losing your home.
The third step is to figure out what type of home
equity loan you want. In today’s market, there are two popular types of home
equity loans. A line of credit and a closed end loan.
With a line of
credit, it is just like having a credit card with a large credit limit.
Depending upon the bank, you may be required to make minimum monthly payments.
Others may only have you make payments if you’re at your credit limit. If you
have had problems with high credit limits in the past, this may not be a good
idea. It’s best to have discipline with a line of credit and big credit
limits.
Having a closed end loan is just like your standard home mortgage
loan. You borrow the money for a set period of time and make monthly payments
until the loan has been paid off.
The fourth step is to figure out how
long you want to borrow the money. This is where mortgage calculators can help
you. It’s easy to find them online and helps you to avoid having to talk to a
loan broker before you are ready. Try different time frames to see what you can
and can not afford. Be sure to decide if you’re going to take a line of credit
or a closed end loan before you put in your figures. This is an important step
to see how much you can afford repaying on a home equity loan. It’s best again
to use logic, not emotion in regards to how much you can afford to
repay.
The fifth step after choosing the home equity loan you want, is to
find a good bank or lender. Shopping online can save you valuable time. Banks
and lenders are very competitive for your business online. You can use this to
your advantage and save money on fees. Be sure to look over the fine print of
your home equity loan contract before signing anything. Read everything, and if
you have a questions be sure to have them answered first. Be very clear on
everything and take your time.
A home equity loan is a great way to help
you take care of things you would like done or feel you need. If done properly ,
a home equity loan can be a valuable resource. Educate yourself to find out what
is best for your situation. Try not to compare your situation to someone else.
Only you know what is best for you. Home equity loans can be a big windfall or a
big headache. It really depends upon you taking the time to research your
options and choosing the right loan.
About the Author
Dean Shainin is a consultant
specializing in home equity loan strategies, refinance and consumer home loan
information. Grab a copy of "The Ten Dirty Little Secrets Of Mortgage Financing"
at: http://www.homemortgageloantips.com Copyright
2005 Dean Shainin
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