Home Equity Loan Lowdown

Lenders Don't Part With Their Money Easily

Home equity loans are still an attractive proposition because of their low interest rates. But there is one thing you need to know about this market -- lenders are very cautious about the amount they lend. Their priority is value of collateral and prompt recovery of the loan. Market-day.net reports:

Creditors prefer granting amounts less than or equal to the market value of your collateral. A borrower with exceptional credit history can expect amounts up to 125% of the collateral, while someone with a turbulent standing may get about 60% of it. There is more scope to borrow larger amounts as long as you satisfy the lender of your ability to repay the loan.

Read more: Homeowner Loans : A 3D View of Ownership!

Home Equity Loans: Wise Decision?

The past few years have seen numerous Americans establishing lines of credit secured by the equity in their homes or have borrowed a lum sum amount secured by their home. For marginal borrowers this can turn out to be highly risky as it exposes these families to the loss of their homes. Bestsyndication.com reports:

Prior to mortgaging or refinancing a home you should consider what your families finances would look like if one or more of your family members living in the home lost their job or came down with a serious illness.

Read more: The Use of Home Equity Loans - Wise or Not Wise?

Know How Your Lender Assesses You

Taking a loan against your home’s equity is not a simple and easy decision. It is one that has to be mulled over, you need to examine the various lenders available, check their offers and decide on the loan that offers you maximum benefits. Now, before offering you that loan, the loan officer will assess you on various fronts and only if you match up to their criteria, will you get a great loan.

One of the most important things here is your creditworthiness. The lending institution considers your creditworthiness when deciding whether to extend a loan and how much of an interest rate you will pay. Your creditworthiness involves three things: your credit history, your income and the loan-to-value ratio. Bankrate.com reports:

Lenders want to know how much you make and how long you've been at your job, as well as how long you have been working in your particular field. They will look at your total debt-to-income ratio: How much of your monthly income goes toward paying the mortgage, credit card bills, car payment and other obligations, including the payments on the equity debt for which you are applying. Most lenders want to keep that ratio under 36 percent.

Read more: What lenders look for

Arguments For & Against Home Loans

In the past few years a large number of Americans have established lines of credit secured by the equity in their homes or have borrowed a lum sum amount secured by their home. This can be an extremely risky business especially for marginal borrowers as it exposes these families to the loss of their homes. Bestsyndication.com reports:

Prior to mortgaging or refinancing a home you should consider what your families finances would look like if one or more of your family members living in the home lost their job or came down with a serious illness.

Read more: The Use of Home Equity Loans - Wise or Not Wise?

Take The Loan If You Need It, Not Because You Can

For many people today, refinancing their home may be one of the better options available, as their equity may have reached the required watermark. However, you don't need to take a loan against your home's equity, just because you CAN. Assess your needs, check if they are viable, and then only take a home equity loan. Bestsyndication.com reports:

One interesting recommendation is to use that money for something that has the same lasting power as your home – and your mortgage. Financing college educations for your kids is a pretty good example. Adding home improvements is another.

Link: Sorting Through Home Equity Loan Options

Don’t Make These 3 Mistakes When Taking A Loan

Home equity loans still are a wonderful source of credit. However, the problem with taking this kind of a loan is that if you are not careful, you can make some really expensive mistakes – mistakes so costly that you could even end up losing your home. Bestsyndication.com reports:

Borrowing too much money is a common home equity loan mistake. No matter how much money you borrow, you will have to pay it back. Consider this carefully before deciding on the size of your home equity loan. Remember, if you get a large loan and cannot make the large payments, you could be putting your home at risk.

Read more: 3 Most Expensive Home Equity Loan Mistakes

It’s not easy having a HELOC

Having a home equity line of credit (HELOC) is not an easy task. The problem with it is that you are forced to answer a couple of uncomfortable questions. Questions that may help you with your finances but are nevertheless, troublesome. One of the first things you are required to ask yourself is if you should keep the credit line, even though the rate has almost doubled in 21 months or refinance it.

The fact that credit lines are indexed to the prime rate meant that the good times couldn’t continue forever. Every time the Federal Reserve raises short-term rates, borrowers' minimum monthly payments go up. So now, the average rate on a credit line is higher than the average fixed-rate home equity loan. And if you go in for a 30-year, fixed-rate mortgage, you will find it even cheaper than the credit line.

Finance Education With A Home Equity Loan

Are you one of those many parents who are funding their child’s education? You are probably finding it pretty tough and now with interest rates shooting up, you could probably think of taking a home equity loan to cover your costs. Azstarnet.com reports:

Home-equity loans can be fixed-rate or variable, but because they're secured by your residence, they're likely to be offered at a somewhat lower rate of interest. Also, federal tax laws allow you to deduct home equity interest of as much as $100,000, no matter what the money was used for.

Read more: Personal Finance Home equity loan one refinancing option

Loan Interest May Not Be Tax-free in Your State

If you are considering a home equity loan (you are a brave one I must say!!) you are probably hoping that you can save tax on the interest you pay for the loan. In most cases, this would be the case. However, there are some states in which home equity loan interest is not tax deductible. So, it is important for you to check out the rules and regulations in your area before you sign up for the loan.

Another thing you need to watch out for are fees, charges and other extra costs that may be attached to your loan. Paying lots of points and fees could mean that you're not saving as much as you think with your home equity loan. Agreed, a home equity loan can be a smart way to consolidate debt, make sure you carefully research your decision--and weigh the pros and cons--before signing on the dotted line.

Home equity loan industry fraught with frauds: FTC

Home equity loans are one of the most popular type of loan facility available today and most people still borrow loans on their homes for purposes like funding a child’s college education or refurbishing the home and other needs. And the reason is not far to seek. Home equity loans offer some of the best terms in the industry – interest rates are still much lower than that for other loans. Because of this, many people are now even borrowing against their homes for holidays or for buying gifts for friends and relatives. I know this sounds ridiculous but that is what happens when you can get a loan for almost negligible interest.

Because this industry is so lucrative and the prospects are mind numbing, you must be especially careful and beware of the many frauds and other problems that are associated with some lenders. This warning is directed especially at people with a bad credit, since they are very vulnerable. And these frauds have bored so deep into the system that the Federal Trade Commission (FTC) was forced to issue a warning to people urging them to be aware of such loan practices. If you don’t take heed, you may end up losing your home, it warned.

I know it sounds scary and you begin to wonder if you could actually trust anybody. But a few simple tricks will ensure that you aren’t conned. When you plan to borrow, try to keep a cool head and find out if the lender you approach is credible. Some lenders try to ‘steal’ your equity by asking you to pad your income in order to qualify for a loan. Why do they do this? Because if you have a bad credit history, it is possible that at some point of time, you will be unable to make your payments. The lender is waiting for just such a moment to foreclose your home and take away your equity. There may be hidden costs associated with the foreclosure or you may be forced to pay exorbitant prepayment penalties. Don’t indulge such lenders and always read the fine print before you sign any documents.