Home owners who need cash now may qualify for a home equity loan, assuming they meet certain requirements. However, due to the mortgage crisis, lenders are stricter about lending. Do you qualify, and if so is a home equity loan right for you?
Home Equity Loan Vs Home Equity Line of Credit
There are two types of home equity debt: home equity home loans and home equity lines of credit. A home equity loan is a fixed rate, lump sum. A home equity line of credit is revolving, which means you can continue to borrow on the loan, up to its limit, as long as you are making payments on it. A home equity line of credit is a variable interest rate loan with varying payments.
Calculating Home Equity
A home equity loan uses your house as collateral and is calculated by taking a percentage of your home’s appraisal, up to 125% (though increasingly rare) and subtracting the remaining balance. Keep in mind that if you cannot maintain payment, you could lose your home.
Since a higher appraisal can lead to a higher home equity line, put some effort into your house prior to the appraisal. Cleaning, painting and minor repairs can help make your house look like more than it’s worth. Keep in mind that you should never borrow more than you need.
Lenders determine your home equity line of credit based on your income, debts, financial obligations and your credit and repayment history.
Truth in Lending
The Truth in Lending Act requires lenders to fully disclose all fees and payment terms related to the loan, including the APR.
Look out for prepayment penalties which restrict you from paying your loan off sooner, and can result in a hefty fine.
With any loan, understand the commitment and always read the fine print.