Friday, January 18, 2008

Know about Home Equity Loans

When we consider taking up a loan for building or buying a house the common type of loan available is a secured home loan. The secured home loan can be secured in two ways either the house which is being bought with the loan will be used as security in which case the loan will be called a mortgage or in the second case the house being bought by the loan will not be the security of the loan instead some other collateral like a real estate or piece of land will secure the loan. Secured loans that are called mortgage are given on a house or a car usually.

The value of the loan is determined by looking at the value of the house. The value of the loan will never equal the value of the house. A gap between the values will always exist to secure the lender against any rate changes or default on the loan. The gap between the value of the house and the value of the mortgagee is called the equity of the house. Home equity can be taken out of the house and can be applied for any purpose such as paying college tuition, paying medical bills or any other similar expense. A home equity loan is generated as the second degree loan and it is the loan or the mortgage that replaces the old deal of mortgagee on the house freeing the equity in the form of cash. In order to get the home equity freed the home owner has to apply for the home loan refinance which will then generate a new home equity credit. Home equity credit is different from home equity loan.

The person applying for refinance can also opt for cash out refinance by virtue of which the home owner will be paid the equity of his house in cash and the new home equity loans are generated in this manner. The new loan that is created puts the house in the hands of the lender as a lien. Home equity rates are lower then the rates that were previously applicable on the loan. In order to qualify for a home equity mortgage the person has to show an excellent credit history and the credit rating has to be either flawless or something close to flawless.

As explained in order to get a low home equity loan or one with a low interest applicable a borrower will have to give proof of flawless or extremely good credit rating as this is the factor that is considered by the lender first and foremost. The rates that will apply to the loan will depend on the credit rating and hence; a person with a bad credit rating will only be eligible to get bad credit home equity.

In a home equity loan credit the person takes up a new loan and the equity of the house is used as collateral. The home equity line or the home equity credit line can help in paying for the house repairs which are an investment in the house after all. It is better to choose this method then considering the method of taking another loan to finance the home repairs. In this way the house pays itself for its uplifting. The home equity of the house is reduced once the home equity line of credit is issued. Also a lien is created against the house on which the loan is taken and out of the house which gives out the equity. Such loans are considered as second position liens. The loan that is taken by keeping the house as collateral is the first hand loan and is then replaced by a loan that is negotiated on better and lower equity loan rate. There are two types of equity loans open end and closed end.

Closed End Home Equity Loan

On these loans the borrower receives a lump sum at the time of loan deal closing. The borrower is not allowed to borrow any money further as it is not possible. The amount of money that can be borrowed by the borrower can be calculated using factors like his credit rating, value of the house being used as collateral and other such factors. Although most lenders will take the amount of liens out of your home equity and then lend the rest of the money to you but some people lend amounts that are over the value of the house. These loans are called over equity loans. These loans are not very common and lenders who deal in such loans can only rarely be found. In some states the state government imposes restrictions on how much equity of the house can be loaned out. The pay back period of these closed ends home equity credit can be spread over up to 15 years and this period is usually smaller then the original period of the mortgage payback. The home equity rate applicable to these loans is a fixed interest rate. Some deals of pay back end in a balloon payment and if you can not pay the money back in a huge sum then it is better to pay over the monthly installments or to get your loan refinanced to avoid defaulting at the last minute.

Open End Home Equity Loan

In the open end home equity loans you are offered a line of credit by the lender. This line of credit is available to the borrower equal to the 100% value of the house just like in close end loans. But the money can not only be taken out once. The borrower can continue to take money out when ever he needs it for 30 years. These lines of credit are available on a variable home equity loan rate. There is a margin included in the rate that is determined along with the prime rate that is the major determinant of the rate. The minimum that a person may have to pay monthly could be equal to just the interest due.

No comments:

Template by : uniQue template  |  Modified by : Owner Blog