When property owners apply for a home equity loan or credit line, the available capital is used as collateral. Home equity can be calculated by subtracting the balance owed on the home loan from the appraised property value. Unfortunately, the banking and real estate crisis depleted accrued equity for many homeowners due to significantly reduced property values.
Before tying up home equity in second mortgages or lines of credit, borrowers must determine if this is the best financial option. Most borrowers have every intention of paying off home loans, but even the best-laid plans can fail. By using real estate as collateral, homeowners could be placing their property at risk for foreclosure.
Homeowners require home equity loans for many reasons. The most common include making home improvements and paying off credit cards and unsecured loans. Home loans can be a good choice for borrowers carrying more than $10,000 in outstanding debts.
The Interest Rates For Home Loans
The interest rate assessed against home loans can be substantially less than interest assessed against unsecured loans. Transferring shares to a low-interest loan can save borrowers hundreds of dollars in interest charges.
Using The Second Mortgage In Paying Off Student Loans
Some people take out home equity loans to consolidate college loans. Several options exist including second mortgages for consolidating student loans without using real estate financing. Post graduates with federal student loans should research education loan consolidation alternatives by visiting the Department of Education website at ed.gov.
Student loans have a very low-interest rate, and the under graduate only has to start paying back the loan after graduation. This is fine while the student is still studying, but once they have graduated, it is tough to start out a new life with a lot of debts that have accumulated during the survey period. Some banks consider this factor and give the student a grace period after graduation to first find a permanent job before they have to start monthly payments on their loans.
It is a great help to students if their parents or guardians would consider supporting them financially by taking second mortgages as well. These loans would be paid off monthly, and by the time the child has graduated the loan would be paid off or almost paid off in full. Various credits can be used to pay college fees.
The second mortgage can be a large sum of money. This could cover the college fees and other expenses. It would take a couple of years to back this loan. An arrangement could be made with the student that once they have graduated, they could contribute towards the monthly payments to help the parents. This would be a far better arrangement than having large amounts of money to pay back after graduation.
Homeowners needing to make home improvements or consolidate unsecured debts may find a home equity line of credit to be a better option. HELOC loans offer borrowers a line of credit which can be used as needed. Mortgage lenders base the amount of available credit on the amount of accrued equity, along with the borrower's credit history and FICO score.
Borrowers are only required to pay interest against funds they borrow from their line of credit. For example, a homeowner obtains an HELOC loan with a $30,000 line of credit and borrows $10,000 for home improvements. The bank assesses interest against the $10,000, not the full amount of available credit. Each time homeowners make a payment, their available line of credit increases.
Borrowers can elect to repay borrowed funds in a lump sum payment or through a monthly installment plan. A unique feature of HELOC loans is during the first ten years borrowers can choose to pay only the interest assessed on borrowed funds. Afterward, they enter into the 'draw' period and must pay the outstanding balance in full.
Depending on the circumstances, obtaining a second mortgage may be a better choice than getting a home equity loan or line of credit. With second mortgages, homeowners borrow a fixed amount of money which is paid via monthly installments over a period.
Homeowners should take the time to thoroughly research each type of home loan to determine which is best suited for their needs. For most people, their home is their most valuable asset. Securing a loan with real estate can have severe consequences if borrowers are unable to adhere to loan payment obligations.
The best source for obtaining accurate information regarding home equity loans is the Federal Reserve Board website at FederalReserve.gov. Visitors can learn how home equity loans are repaid; understand what to look for when shopping for a home loan lender, and use loan calculators to evaluate the cost of obtaining a home equity loan or line of credit.