This is the first of four planned posts on the subject of home equity loans.
We’re using a four part article published by the Federal Trade Commission (FTC) on their Consumer Information website. You can and should visit this site, not only to view this article but to see the other topics of information that pertain to many of us. Click here to visit.
Four part Series:
- Home Equity Loans – (This post)
- Home Equity Lines of Credit – (March 4)
- The Three-Day Cancellation Rule – (March 11)
- Harmful Home Equity Practices – (March 18)
Home Equity Loans and Credit Lines – Introduction
If you’re thinking about making some home improvements or looking at ways to pay for your child’s college education, you may be thinking about tapping into your home’s equity — the difference between what your home could sell for and what you owe on the mortgage — as a way to cover the costs.
Loan or Line of Credit
Home equity financing can be set up as a loan or a line of credit. With a home equity loan, the lender advances you the total loan amount upfront, while a home equity credit line provides a source of funds that you can draw on as needed.
Shop and Compare
When considering a home equity loan or credit line, shop around and compare loan plans offered by banks, savings and loans, credit unions, and mortgage companies. Shopping can help you get a better deal.
Stay Within Your Budget
Remember that your home secures the amount that you borrow through a home equity loan or line of credit. If you don’t pay your debt, the lender may be able to force you to sell your home to satisfy the debt.
Home Equity Loans
A home equity loan is a loan for a fixed amount of money that is secured by your home. You repay the loan with equal monthly payments over a fixed term, just like your original mortgage. If you don’t repay the loan as agreed, your lender can foreclose on your home.
The amount that you can borrow usually is limited to 85 percent of the equity in your home. The actual amount of the loan also depends on your income, credit history, and the market value of your home.
Ask friends and family for recommendations of lenders. Then, shop and compare terms. Talk with banks, savings and loans, credit unions, mortgage companies, and mortgage brokers. But take note: brokers don’t lend money; they help arrange loans.
Ask all the lenders you interview to explain the loan plans available to you. If you don’t understand any loan terms and conditions, ask questions. They could mean higher costs. Knowing just the amount of the monthly payment or the interest rate is not enough. The annual percentage rate (APR) for a home equity loan takes points and financing charges into consideration. Pay close attention to fees, including the application or loan processing fee, origination or underwriting fee, lender or funding fee, appraisal fee, document preparation and recording fees, and broker fees; these may be quoted as points, origination fees, or interest rate add-on. If points and other fees are added to your loan amount, you’ll pay more to finance them.
Ask for your credit score. Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences — like your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and how long you’ve had your accounts — is collected from your credit application and your credit report. Creditors compare this information to the credit performance of people with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — your credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when they’re due. For more information on credit scores, read How Credit Scores Affect the Price of Credit and Insurance.
Negotiate with more than one lender. Don’t be afraid to make lenders and brokers compete for your business by letting them know that you’re shopping for the best deal. Ask each lender to lower the points, fees, or interest rate. And ask each to meet — or beat — the terms of the other lenders.
Before you sign, read the loan closing papers carefully. If the loan isn’t what you expected or wanted, don’t sign. Either negotiate changes or walk away. You also generally have the right to cancel the deal for any reason — and without penalty — within three days after signing the loan papers. For more information, see The Three-Day Cancellation Rule. (editors note: the 3rd post will be on the subject of The Three-Day Cancellation Rule. If you would like to visit this topic now, go to https://www.consumer.ftc.gov/articles/0227-home-equity-loans-and-credit-lines
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