How A First Mortgage Differs From A Home Equity Loan
A first mortgage and a home equity loan are two different types of loans. A first mortgage is taken out then the home is initially purchased. A home equity loan is a loan that is given to those who already own a home and want to borrow against their equity. This way, their equity acts as collateral for the loan which means if they default on the home equity loan they could lose their house.
When it comes to obtaining a first mortgage, the borrower doesn't have any collateral other than the home itself. Therefore the amount of the loan will be determined by the value of the home. That is why it is common to require a down payment of 10% to 20% on a first mortgage. Lenders rarely finance 100% of the value of a home. If the borrower defaults on the loan then the lender will foreclose on it and sell it in order to recover his losses. First time home buyers often use the Fanny Mae program to help them buy the home. Fanny Mae helps those that don't have equity or collateral to buy homes. These are usually lower priced homes.
When it comes to obtaining a home equity loan, the lender will look at the amount that is still owed on the home and compare that against its current market value. That is what determines the home's equity. The lender may choose to finance up to 100% of the equity and use the home as collateral. In any event, if the borrower is unable to make the monthly payments, the house will still be repossessed.
In addition, when taking out a home equity loan, it is possible to do a home equity plus refinance. This option is a combination of a mortgage and cash equity loan. Instead of having the original mortgage payment along with the home equity loan payment, the refinance option will bundle the two loans into one single payment. In order to use this option, one must have a good amount of equity built up in their home. Then they simply re-mortgage their home and cash out the excess equity. This is particularly beneficial when the interest rates have lowered since the home was originally mortgaged.
Since buying a home or taking out a home equity loan usually involves large sums of money, it is a good idea to make sure the terms of the loan are fully understood before signing any paperwork. Any time money is borrowed against one's home, there is the risk of losing the home if at any time in the future it becomes impossible to keep up with the payments.
Home Equity Loans: Things To Consider
Homeowners need to be careful when taking out a home equity loan. It is a good idea to know the value of your home's equity before taking out such a loan or you might wind up paying back more than your home is worth. Equity is the amount your home is currently worth after subtracting the amount still owed and taking into account the increase or decrease based on current market value. For example, if you purchased your home several years ago for a price of $200,000, then your home should be worth much more than that today due to the rise in market value.
Some homeowners want to take out home equity loans in order to carry out home improvement projects because they believe that modernizing their home will increase its value. It is important to know however, that market equity rates are already factored into the current value of your home. Home improvements are usually a good thing, but if it is not really needed, it could cause you to go deeper in debt. You could take out a personal loan instead of a home equity loan so your home equity is not affected, but you still have to pay back the loan with interest, so it could have a detrimental effect on your personal finances to do the home improvement if you are not certain it will actually raise the market value of your home.
If you do decide to take out a home equity loan for a home improvement project, just realize that it is just like taking out a new mortgage. You must pay closing costs, fees, capital and interest on the loan. This is true for any home equity loan that you take out regardless of the reason. That is why it is very important to think things through and make sure an equity loan against your home is the wisest choice for your situation.
Consider also what might happen if you are unable to repay your loan because of illness or if you lose your job. In that case, if you have taken out a home equity loan, you risk losing your home. Laws vary by state so you should understand the laws where you live. It might be safer for you to protect your home and take out a different type of loan if you have a choice. A home equity loan could be the answer to your financial woes or it could be a financial disaster for you. That is why it is very important to carefully think things through before you act. Seek advice from a financial counselor if you need help making a responsible decision.
Home Equity Loans: What Factors Lenders Consider
When a lender considers whether or not to approve your home equity loan application, he will compare the equity in your home against the loan amount you have requested. Usually, lenders are willing to offer home equity loans up to 80% of the equity amount, although it is not uncommon for some lenders to offer the full 100%. In fact, it is possible that a lender would even grant your loan request for an amount that is greater than your equity but would probably apply higher interest rates or shorter terms to compensate for the increased risk.
Lenders will offer a varying interest rate depending upon your credit score and other qualifiers but they still must comply with the rules set forth by Freddie Mac and Fannie Mae when it comes to risk factors. Since there is some leeway for individual lenders it is a good idea to carefully read and make sure you understand the stipulations, restrictions, clauses, rates, exclusions, and terms for the loan before you sign the dotted line. The rate and terms you are offered will depend upon your credit score, ability to repay the debt and your wages.
Before settling on any one loan, it is a good idea to shop around. Consider the amount you need to borrow. If it isn't a large amount, you might be better off with a credit line and if it is a large amount, you might be better off with a total refinance of your mortgage so you can cash out your equity. Also, bear in mind that you should understand the different types of financing. For example, it is usually better to opt for a fixed rate instead of being seduced by low initial variable rates. A fixed rate means your loan payment will be the same every month until your loan is paid off. A variable rate means your loan payment could rise along with inflation until you are unable to afford your payment in 5 or 10 years.
When it comes to applying for a home equity loan, the most important factor the lender will consider is the amount of the loan request as compared to the amount of your equity. Next, the lender will consider your credit score and income. Therefore, if you think you will be taking out a home equity loan, it is a good idea to get your credit cleaned up before you apply. Also, if you intend to change jobs, it would be best to apply for your loan before switching employment. You want your income and finances to look as stable as possible so the lender won't have an excuse to reject your home equity loan application.
The Home Equity Loan Application Process
When you finally decide to take out a home equity loan after much careful consideration, it is time to go through the application process. Unless you are applying for your home equity loan online, chances are that you will complete the application in the lending office either at a bank or mortgage company.
The loan officer will interview you first to make sure that you are a good candidate for a home equity loan. He will ask you to complete a loan contract. Early in the process, he will run a credit check to make sure that you do not have any liens, judgments, or other black marks on your credit report. If your credit falls below their accepted levels, you will not be able to take out a loan. In some instances, you might be able to take out a loan but at a much higher interest rate since you will be viewed as a risky borrower.
If your credit passes, the lender will go on to check your employment history and your other financial obligations to make sure that you have a stable income and don't have too many other monthly payments to take on another loan. Once the lender has checked out all of your information, you may need to wait a few hours or a day before you find out if your loan has actually been approved by the institution.
Once you have been approved, you must be sure to ask questions of the lender before signing any papers. Make sure you understand your interest rte, the total amount you will repay, and your monthly payments. Read over your contract thoroughly and ask questions about the parts you do not understand. After all, a home equity loan puts your family's home on the line so you don't want to do anything rash.
If there are no hitches such as poor credit or the inability to verify some of your information, it is possible you will be able to get your home equity loan the same day, but it usually takes one to two business days to receive your check.
It is possible today to apply for a home equity loan over the internet. A loan officer may call you to discuss your loan over the phone, but as long as you submit your personal details, the credit check and verification can be done from the information you submit. Just be aware that you will need to enter sensitive information such as your address and social security number into an online form so you want to take precautions to protect your privacy. Only give your personal details to a well known and reliable financial institution and ensure the website uses the latest security measures to protect you. Applying for a home equity loan online is fast and easy but you will still need to qualify in terms of credit score and debt to income ratio.
Questions To Ponder About A Home Equity Loan
What exactly is a home equity loan? Equity is the value of your home minus the amount you still owe on it and it helps to determine the fairness of the worthiness of the loan. Anytime a lender offers a loan, they expect to receive some sort of collateral as security against the loan. The collateral must be fair as in it must be equal to the loan's worth. This is done so the lender assumes less risk in extending the loan. If, for whatever reason, you are not able to make your loan payments then the lender can seize your home, and sell it to get his money back.
That is why it is so important when taking out a home equity loan that you make sure you will be able to easily make your monthly payments. If something unforeseen should occur and you miss payments then your home could go into foreclosure and repossession. You could face bankruptcy and have your credit ruined with court judgments, liens, or worse.
The first thing you should do if figure out the value of your home. Find out exactly how much you still owe on it and then determine your equity. Now, how much money do you intend to borrow with your home equity loan? Can you afford the increase in monthly payments? What is the purpose of the loan? Is it vitally important? Can you get the money in another, less risky way? You should ask yourself the above questions at the very least so that you can minimize your risk of loss over taking out a home equity loan.
Remember that you could lose your home in the event that you are unable to repay the equity loan. It is always a good idea to shop around for various types of loans and loans from various lenders so you can choose the best terms and interest rates for you. Lenders are all too happy and eager to offer you a home equity loan because they know they can seize your home if you fail to make your payments. So don't fall for their over hyped sales pitches. Instead, take your time and think things through so that you make the right choice for your finances. Remember to read the fine print and make sure you fully understand the terms before signing any loan papers, especially for a home equity loan.
Ask yourself the basic questions so that you understand the value of your home and the amount of your new monthly payments. Do you want to take out a home equity loan because you are in financial trouble and want to consolidate your bills? Be especially careful if this is the case. If you do not also change your poor financial habits, you will soon find yourself back in the same financial tight spot but without the equity you once had. In other words, you will be worse off and in real risk of losing your home.
Can You Get A Home Equity Loan If You Are Self Employed?
If you are self employed you may be wondering if you can take out a home equity loan? The answer is that you can. In fact, it is a lot easier to do so today than in previous years since self employment is so common now. However, the process that you go through will be somewhat different than if you have an employer and W2 forms to submit as proof of income.
You might find that the regulations are a little tighter when applying for a home equity loan through a traditional lender such as a bank. For example, they might require that you have been self employed for 2 or even 3 years. They will want to see your tax returns for the years you have been self employed so they can get an overview of how stable your income is.
It is possible you can find it easier to work with a mortgage lender who specializes in home equity loans for the self employed. These types of lenders sometimes offer a 'no proof of income' loan which is very friendly towards those who are self employed. In this instance, you won't have to worry about proving your income stability, but usually in order to compensate for that freedom, you will have to make other concessions. For example if it is a first mortgage, you will likely have to put up a large down payment, and for home equity loans, you will probably not be able to borrow 100% of your equity.
It is important as a self employed individual that you keep good records of your business. Those records will come in handy at times like when you are applying for a home equity loan. The more thoroughly you are documented, the less risky you seem to be and therefore more banks will be willing to take a chance on loaning you money. It could also mean that your loan will have a lower interest rate if you are not considered a high risk.
One thing is for certain, self employed home equity loans are not uncommon today. Self employment is at an all time high and financial institutions are aware of this fact and have special programs and regulations in place to serve this group of borrowers.
Just remember to follow the guidelines of responsible borrowing whether you are self employed or not. Don't borrow more than you can comfortably afford to repay, shop around for the lowest rate and be sure to understand the terms before you sign. With a little work and attention to detail in your record keeping, you will likely find that in today's world it is easy to qualify for a home equity loan if you are self employed.
Types Of Home Equity Loans
It is easy nowadays to get a home equity loan to pay off high interest credit cards, do home improvement, or pay off student loans. There are many options available from traditional lenders and mortgage brokers alike. One can choose to consolidate and refinance an existing mortgage or obtain a line of credit purely on the equity itself. Let's take a quick look at the options.
A loan on the equity of your home might be offered to you a competitive rate of say 5.74% for example. However, if you choose to roll over the equity in your home and totally refinance, you might be able to drop that interest rate down quite a bit. This will also work to reduce the total monthly payments instead of increasing them. A home equity line of credit is a flexible option which allows you to use your equity as you see fit whenever you need it and then pay it back on your own terms.
Home equity loans are fairly easy to get and quick too, but beware of scams and statements of 'no credit check' since by law, lenders must perform a credit check for such a loan. Still, the lender may be much more forgiving of bad credit as compared to when applying for a first mortgage.
When choosing which type of home equity loan is best for you, you should probably look closely at how much your monthly payments will increase with the added loan. You might decide it is best for you to cash out your equity and refinance your mortgage to get a lower monthly payment. When doing this you will need to take into account the current market value of your home and the current interest rates also. You certainly don't want to refinance at a higher rate if you can avoid it.
The type of home equity loan you choose will depend upon what you intend to use it for also. You may want to consolidate your bills but this will require some forethought. For example, if you incorporate your student loans into your home equity loan, you might pay more in the long run since student loans from the government tend to have low interest rates to begin with. If you need a home equity loan for a home improvement project, then consider how much the value of your home will increase thanks to the home improvement.
Before deciding on which type of home equity loan to choose, be sure to shop around for rates so you get the best deal possible. Different institutions will offer different rates and the same institution will even offer different rates for different types of home equity loans. Getting a lower rate can save you thousands of dollars over the life of your loan so it is worth the effort.