Home Equity Loan Lowdown

Home Equity Loans Are Passé

--By Priya Jestin, Staff Writer

Time was when just about everybody worth his home, took a home equity loan. These loans were the most popular means for homeowners with a mortgage to borrow. The main attraction was the low interest rate and the tax-deductible nature of the interest. While these loans are still good, they may not be the best solution to your problems.

While the housing boom was on, these loans made very good sense. However, now, interest rates on short-term home-equity lines of credit have sharply increased. And this, at a time when the housing market is at its lowest ebb.

This leaves homeowners with a very small cushion to fall back on should they be unable to repay the money they borrowed. If you plan to take a home-equity loan, first determine when you will need the money and how soon you will be able to repay it. This will help you get a better deal.

Do You Qualify For A Reverse Mortgage?

--By Priya Jestin, Staff Writer

Are you into your 60s and own a fairly decent-sized home? If you are in need of money, you can think about using the equity in your home. According to the National Reverse Mortgage Lenders Association, the higher federal loan limits have many benefits for older homeowners. With a reverse mortgage, senior homeowners can now tap into a larger portion of the equity in their homes.

If your liquid savings are not too high but you have a house with a lot of equity, then this product helps you better your finances. So, what is a reverse mortgage and how can it benefit the older generation. To get the benefits of this tool, you must fulfill certain requirements. Firstly, you have to be 62 or older for this.

You can take a loan on the house or in other words, you can pull out the equity in your home in the form of a loan. And what’s the best part about this loan? It doesn’t need to be repaid until you either move house, sell it or die. That means you have years ahead of you before you need to think about repaying that loan!

There is just one serious catch to the product. Your loan amount will depend on your age, current interest rate and other loan fees. To get an estimate of how much you might get in a reverse mortgage, check out AARP's "Reverse Mortgage Calculator" at www.rmaarp.com. AARP is an extremely useful and unbiased source of information on reverse mortgages. For more information go to AARP's very useful Web page on this topic.

Know Your Home Equity Loan

According to bankers, the recent fever to tap home equity has finally cooled. Now, new fixed-rate offerings are attracting homeowners to convert adjustable rates to more predictable payments. This way, clients are now taking home equity loans with fixed payments for five to 30 years. The loan comes at a fixed interest rate and at least a small amount going to pay off the principal every month.

Since conversions allow consumers to convert all or part of their adjustable rate balance to a fixed rate, increasing numbers of customers are now converting. Even banks are now promoting the fixed rate rather aggressively. With this method, you are essentially locking in a portion of the borrowed money at a fixed rate. This can be paid back in principal and interest. Madison.com reports:

Rates on home equity lines of credit are higher versus one and five years ago, while rates on fixed-rate home equity loans are lower than five years ago, said Greg McBride, senior financial analyst for Bankrate.com., an Web-based aggregator of financial rate information.

Read more: Getting a fix on home equity loans

Home Equity Loan Delinquencies Down: ABA

Home equity loan delinquencies fell to 1.89 percent from 1.94 percent in the second quarter, according to a recent report by the American Bankers Association. The ABA’s quarterly survey of more than 300 banks nationwide shows a slight increase overall in the percentage of consumer loans that are 30 days or more past due during the second quarter of 2006. Dsnews.com reports:

Property improvement loans and mobile home loans were among those loan types that had an increase in delinquencies. Property improvement delinquencies increased to 1.48 percent from 1.42 percent, while mobile home loan delinquencies rose to 3.61 percent from 3.37 percent.

Read more: ABA: Second Quarter Home Equity Loan Delinquencies Down

Before You Take That Loan

Taking a loan is the easiest part of a deal. Making plans to repay the loan and ensuring that you repay on time, is the big headache. In the case of a home equity loan, it not only constitutes a headache but also a fear of losing your home. So, before you enter into any agreement, you must first consider how you will pay back the money you borrow.

Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But in this case, the portion that goes toward principal may not be enough to repay the principal by the end of the term. There are other plans that allow payment of interest alone during the life of the plan. One thing you should remember is irrespective of your payment mode, you should have made preparations to pay off the loan. Federalreserve.gov reports:

Whatever your payment arrangements during the life of the plan--whether you pay some, a little, or none of the principal amount of the loan--when the plan ends you may have to pay the entire balance owed, all at once. You must be prepared to make this "balloon payment" by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.

Read more: When your home is on the line

Avoiding The HELOC Trap

Now may be just about the worst possible time to take money from your home. And quite a few economists have taken on the role of doomsayers as they predict a really bad recession. At such a time, a loan against your home is a surefire way to lose your home. One of the biggest risks is that our home is a collateral for the loan. So if we default, well, we’ll not only be broke but also out on the streets. One way to avoid something so drastic is to leave some breathing room for ourselves. For instance, after accounting for your primary mortgage and your HELOC, you should have a decent value of your home still available as equity. This helps us prepare for the unexpected.

However, I still think the best way is to not touch that home unless absolutely necessary. Before we tap into our home’s equity, we could try other methods of raising money. One of the most popular methods of getting money is to borrow from your 401(k). Usually, most retirement plans will allow you to borrow funds from them. You will have to repay it with interest over time. And it works out better than a credit card loan because the interest rates are much lower.

Alternately, you could also borrow from your life insurance policy. But that is possible only if you have a whole life policy. Then you can access the cash balance for personal needs while you’re still alive. Another benefit is that you may not have to pay back the loan.

Boom’s Over, Now Comes The Bust

Guess bad times shadow everyone. I mean until now I only thought about how bad things were for me. A high interest rate on my home equity line of credit was just the beginning of a long list of highs. And none of this is going to end anytime now thanks to the Feds. Since June 2004 it has raised short-term interest rates from 1 percent to 5.25 percent. This was with the intent of achieving a "soft landing" – an economic slowdown that reduces inflation without causing a recession

I have a feeling that things are not going to be so easy. At the end of the day, it’s us homeowners who will take a big beating. My only worry is if people like us will be able to tide over these hard times. Only time will tell.

'RAM' Into Your Home's Equity

If you are a senior person, then you probably need to know about reverse annuity mortgages (RAM). These mortgages were created to allow older Americans to tap into the equity of their paid for or nearly paid for home. Homeowners receive a tax-free payment each month, and the mortgage is paid when the home is sold. Bestsyndication.com reports:

The major difference between a RAM and a home equity loan is when the loan balance is due. With a RAM, the mortgage balance is due when you stop living in the residence. You don’t have the monthly payments of an equity loan. With a RAM it is easier to qualify for the mortgage since you don’t have to have income to make monthly payments.

Read more: Reverse Annuity Mortgage – Tapping Into Your Equity

In Michigan, Home Rates Rise Slower Than Loan Rates

Second mortgages and home-equity credit lines are on the upswing in Michigan, as they are across the nation. But here, they come at a dangerous price, as median property values in the state aren't increasing as they are elsewhere in the United States. Freep.com reports:

The Census Bureau released data for publication today showing that Michigan's median home values rose 19% in the last five years, compared with a national average of 32%. Meanwhile, 19% of Michigan homes have a second loan on them. Nationwide, 17% do.

Read more: CENSUS 2006: Home owners risking big debt