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Costs of a Home Equity Loan |
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Written by Administrator
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Saturday, 28 November 2009 01:33 |
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An equity loan will cost you twice. First, you pay fees and closing costs, and then you pay interest.
Fees and closing costs
A home equity loan almost always carries fees and closing costs. Many lenders don't charge fees or closing costs on credit lines. If your lender does charge fees to open a credit line, don't rule out that offer immediately; maybe there are other features that make it a good deal. But shop around.
The fees that you pay for opening an equity account are similar to the ones you pay when you buy a home. The fees can total 2 percent to 5 percent of the loan and are for such things as:
- Property appraisal
- Application
- Title search
- Attorney or title agent
- Document preparation
The most common fee levied on a credit line is for an appraisal or other estimate of the property's value. Sometimes, instead of paying an appraiser to visit the house and compare it to other nearby homes of similar value, the lender accepts a computerized estimate called an automated valuation model, or AVM. Or a real estate agent might estimate the value in what is called a broker's price opinion, or BPO. AVMs and BPOs cost less than full appraisals.
Other fees and interest
The biggest cost you will pay on an equity loan or a credit line is the interest. Home equity loans usually have fixed rates, and credit lines usually have variable rates. If you get an equity loan on the same day that your neighbor gets a home equity line of credit (HELOC), your rate will be higher than your neighbor's. Over time, your neighbor's HELOC rate can rise higher than what you pay on the equity loan, but your rate never changes.
Some lenders offer "teaser" rates that are artificially low for a few months, then adjust to normal levels. The variable rate of a HELOC moves up and down with another rate, called an index. Most banks index HELOC rates to the prime rate or the prevailing yields on Treasury notes.
The lender adds a margin, or fixed number of percentage points, to the index to determine the new rate each time it is adjusted. For example, a HELOC might use the prime rate as an index, with a margin of 1 percentage point. If the prime rate is 3 percent, the HELOC's rate is 4 percent (the 3 percent prime plus 1 percent margin). If prime rises to 3.5 percent, the HELOC's rate will rise to 4.5 percent. Adjustments can be made monthly, quarterly or annually.
Variable-rate loans have a cap on how high the interest can climb over the life of the loan. Most variable-rate lines of credit also have a cap that limits how much, and how often, the interest rate can change during the course of a year. This cap typically prevents the rate from jumping more than two percentage points in a year. Some plans require a minimum monthly payment.
Credit lines sometimes have other fees attached to them, such as annual maintenance charges, transaction fees each time you use the account, or inactivity fees if you don't use the account. Both types of equity debt may be subject to prepayment penalties, which are charged if you pay off or close the account within two or three years.
If you expect to sell the house within a couple of years, don't get an equity account with a prepayment penalty.
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Written by Administrator
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Saturday, 28 November 2009 01:32 |
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A home equity loan or line of credit allows you to borrow money, using your home's equity as collateral.
First, some definitions:
Collateral is property that you pledge as a guarantee that you will repay a debt. If you don't repay the debt, the lender can take your collateral and sell it to get its money back. With a home equity loan or line of credit, you pledge your home as collateral. You can lose the home and be forced to move out if you don't repay the debt.
Equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have a home equity loan or line of credit).
Example 1
Let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. The day you buy the house, your equity is the same as the down payment -- $20,000: $200,000 (home's purchase price) - $180,000 (amount owed) = $20,000 (equity).
Fast-forward five years. You have been making your monthly payments faithfully, and have paid down $13,000 of the mortgage debt, so you owe $167,000. During the same time, the value of the house has increased. Now it is worth $300,000. Your equity is $133,000: $300,000 (home's current appraised value) - $167,000 (amount owed) = $133,000 (equity).
In the housing meltdown that began in 2006, many homes lost equity rather than gained it. Instead of increasing, the value of the house dropped after the home was purchased. In many instances, a home equity loan would not be available.
Using the above example, let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. During the next five years, you paid down $13,000 of your mortage debt.
As home prices fell and homes in your neighborhood went into foreclosure, your home's value dropped by 30 percent, or $54,000, to $126,000. Because the value of your home is less than the amount you owe, you have $41,000 in negative equity and would not be eligible for a home equity loan.
A home equity loan (or line of credit) is a second mortgage that lets you turn equity into cash, allowing you to spend it on home improvements, debt consolidation, college education or other expenses.
Home equity loans and lines of credit usually are repaid in a shorter period than first mortgages. Most commonly, mortgages are set up to be repaid over 30 years. Equity loans and lines of credit often have a repayment period of 15 years, although it might be as short as five and as long as 30 years.
There are two types of home equity debt: home equity loans and home equity lines of credit, also known as HELOCs. Both are sometimes referred to as second mortgages, because they are secured by your property, just like the original, or primary, mortgage.
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Home Equity Loan vs. Line of Credit |
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Written by Administrator
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Saturday, 28 November 2009 01:03 |
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There are two types of home equity loans: term, or closed-end loans, and lines of credit.
Both are sometimes referred to as second mortgages, because they're secured by your property, just like your original (first) mortgage.
Home equity loans and lines of credit are usually for a shorter term than first mortgages. The most common type of mortgages runs 30 years, while equity loans typically have a life of five to 15 years.
The loan
A home equity loan, sometimes called a term loan, is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. Once you get the money, you cannot borrow further from the loan.
The line
A home equity line of credit (HELOC) works more like a credit card. You are allowed to borrow up to a certain amount for the life of the loan -- a time limit set by the lender. During that time you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. Let's say you have a $10,000 line of credit. You borrow $5,000, but then pay back $3,000 toward the principal. You now have $8,000 in available credit. This gives you more flexibility than a fixed-rate home equity loan.
Credit lines have a variable interest rate that fluctuates over the life of the loan. Payments will vary depending on the interest rate and how much credit you have used. When the life span of a line of credit has expired everything must be paid off. A lender may or may not allow a renewal.
Lines of credit are accessed by specially issued checks or a credit card. Lenders often require you to take an initial advance when you set up the loan, withdraw a minimum amount each time you dip into it and keep a minimum amount outstanding.
Financial institutions negotiate a home equity loan just like they do a mortgage: You have to pay off the loan or line of credit when you sell the house.
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Last Updated on Saturday, 28 November 2009 01:25 |
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How Lenders Evaluate Your Loan |
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Written by Administrator
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Saturday, 28 November 2009 00:06 |
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 The lending institution considers your creditworthiness when deciding if to extend a loan and how most of an interest rate you must pay. Your creditworthiness boils down to three things: your credit history, your earning and the loan to value percentage.
Credit bureaus gather info about the amount of debt you have and if you pay your bills punctually. They compile this info into a file called a credit report, , then boil all this down to a number between about 300 and 850. That number is your credit score. on occasion it is called a FICO score, after just Isaac Corp., the company that pioneered credit scoring.
This article describes how to get your credit report and understand it. you may be able to purchase your FICO score directly from just Isaac. Federal law entitles you to one free credit report per year. The report and the score can be bundled together or offered individually.
Your credit report contains:
- Personal info, like your name, address and Social Security number,
- Credit history, like when you opened your accounts, how much you owe, the amount of your credit limitations, if you closed accounts or the creditors closed them, and if you paid punctually,
- Public records, like if you have any bankruptcies, foreclosures, liens, repossessions, or legal judgments against you as well as failing to pay child support or taxes , and
- Lists of recent credit inquiries.
Income
Lenders want to know how much you make and how long you have been at your job, also as how long you have been working in your specific field. they'll look at your total debt to income ratio: How most of your monthly earning goes toward paying the mortgage, credit card bills, car payment and other responsibilities, as well as the payments on the equity debt for which you're applying. Most lenders want to keep that percentage under 36 %.
Be prepared to show your lender proofs of earning, like W-2s, tax returns and other income statements, or get prepared to be refused or pay a higher interest rate.
Loan to value percentage, or LTV
This is the percentage between what you owe on your house and what it is worth. If your house is worth $100,000 and you still owe $80,000, your loan to value percentage is 80 %, because $80,000 is 80 % of $100,000. When you bought the house, calculating the LTV was straightforward: the mortgage amount divided by the home's price.
It is more complex when you get a home equity product, because the home's value most likely changed since you bought it. The lender will get an assessment, or estimate, of the home's current just market value. Then it'll add the current mortgage balance to the size of the equity loan or credit line that you want, and divide that by the home's current value. That results in the new LTV percentage.
Traditionally, equity lenders want to keep your total loan to value at 80 % or less. as an example, if you owe $100,000 on a house that is now valued at $200,000, you could get an equity loan of up to $60,000. A loan that size could increase your total housing debt to $160,000, or 80 % of the home's value. But there are lenders that will go higher - , in some cases, for more than the value of the home. they are called high loan to value high LTV loans, and Bankrate's surveys of home equity lenders include lenders who offer them. Expect to pay a higher rate on such loans. you will only get that loan or credit line, although, if you earn enough to pay for the monthly deposits.
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Last Updated on Saturday, 28 November 2009 00:22 |
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