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Posted by M.D. on May 15, 2006, 4:12 pm
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Article Source: http://EzineArticles.com/?expert=Joseph_Kenny
As the interest rate on credit cards and other loans continues to increase,
many people have turned to home equity loans as a method of borrowing money
at a low interest rate. The equity of your house is the difference between
the value of your house at any given time and the amount of money you owe on
the total balance. A home equity loan is a great tool for consolidating high
interest loans and credit cards.
Another Mortgage - Can You Afford That?
Home equity loans are also known as second mortgages, and can provide you
with many benefits that don't exist with other types of loans. The interest
rates can be much lower than credit cards. It isn't uncommon to see equity
loans which have interest rates which are at least 60% lower than credit
cards. They are also tax deductible for up to $100,000. This makes them the
obvious choice for those who have equity in their homes. Equity loans are
flexible, and homeowners can also use a revolving line of credit to borrow
money.
Security And Equity Are Required
Unlike many other loans and credit cards, home equity loans are secured.
This means that your house is used as collateral. For example, if your house
if worth $300,000, and you've paid off $50,000, you still owe $250,000.
However, if the value of the house has increased from $300,000 to $350,000,
you have $100,000 of equity. You can borrow money against this $100,000 by
using a home equity loan. At the same time, it is important to remember that
if you default on your payments, your home could be taken as collateral to
cover the losses of the bank or mortgage company.
Who Will Lend To Me?
Most banks and mortgages companies enjoy providing home equity loans for
their customers. A house tends to be the largest investment a person has,
and many banks realize that few people will run the risk of losing it by
defaulting on their payments. Because of this, home equity loans are
considered to be a safe investment. Many people who have homes tend to have
a more established credit history than those who do not.
What Can I Use The Home Loan For?
Many people choose to use home equity loans for remodeling their kitchens or
bathrooms. Remodeling a part of your house is a great way to increase its
value. It is also easy to get approved for loans which you plan on using for
remodeling your home. They tend to have very low interest rates, and the
amount you choose to borrow should be dictated by how you plan to remodel
the home.
Another common use for home equity loans is higher education. As the cost of
education continues to rise, it will become harder for many families to send
their children to school. Many parents choose to use a home equity loan to
invest in the education of their children. Despite this, many federal
student loans have low interest rates as well, and parents will want to
weigh all their options carefully before making a decision. Home equity
loans which are used for education have many tax benefits.
My Mom Used To Say, 'Prevention Is Better Than Cure'
Because many Americans don't have health insurance, using equity loans in
the event of an illness or injury is a great way to avoid debt. It has
become much more difficult for people to file bankruptcy, and because of
this it will not be easy to get out of a situation in which you have an
unexpected illness. An equity loan could protect you in a situation where
you have high medical bills with no health insurance. As the cost of
healthcare continues to increase, having a equity loan or line of credit can
greatly help you.
Joseph Kenny writes for the UK Loan Store, visit them here,
http://www.ukpersonalloanstore.co.uk and more information on home loans
available on site.
Article Source: http://EzineArticles.com/?expert=Joseph_Kenny
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Posted by M.D. on May 15, 2006, 4:36 pm
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SOURCE:
http://www.mtgprofessor.com/A%20-%20Second%20Mortgages/what_is_a_heloc.htm
Copyright Jack Guttentag 2003
What is a HELOC?
October 20, 2003
"I have been advised to refinance with a HELOC rather than with a standard
mortgage. Could you explain the difference, and why one might be better than
the other?"
HELOC stands for home equity line of credit, or simply "home equity line."
It is a loan set up as a line of credit for some maximum draw, rather than
for a fixed dollar amount.
For example, using a standard mortgage you might borrow $150,000, which
would be paid out in its entirety at closing. Using a HELOC instead, you
receive the lender's promise to advance you up to $150,000, in an amount and
at a time of your choosing. You can draw on the line by writing a check,
using a special credit card, or in other ways.
HELOCs are convenient for funding intermittent needs, such as paying off
credit cards, making home improvements, or paying college tuition. You draw
and pay interest on only what you need.
Upfront costs are also relatively low. On a $150,000 standard loan,
settlement costs may range from $ 2-5,000, unless the borrower pays an
interest rate high enough for the lender to pay some or all of it. On a
$150,000 HELOC, costs seldom exceed $1,000 and in many cases are paid by the
lender without a rate adjustment.
Most HELOCs are second mortgages. An increasing number, however, are first
mortgages, as yours would be if you used it to refinance your existing first
mortgage. Using a HELOC as a substitute for a first mortgage is risky, for
reasons discussed in a moment.
Because the balance of a HELOC may change from day to day, depending on
draws and repayments, interest on a HELOC is calculated daily rather than
monthly. For example, on a standard 6% mortgage, interest for the month is
.06 divided by 12 or .005, multiplied by the loan balance at the end of the
preceding month. If the balance is $100,000, the interest payment is $500.
On a 6% HELOC, interest for a day is.06 divided by 365 or .000164, which is
multiplied by the average daily balance during the month. If this is
$100,000, the daily interest is $16.44, and over a 30-day month interest
amounts to $493.15; over a 31 day month, it is $509.59.
HELOCs have a draw period, during which the borrower can use the line, and a
repayment period during which it must be repaid. Draw periods are usually 5
to 10 years, during which the borrower is only required to pay interest.
Repayment periods are usually 10 to 20 years, during which the borrower must
make payments to principal equal to the balance at the end of the draw
period divided by the number of months in the repayment period. Some HELOCs,
however, require that the entire balance be repaid at the end of the draw
period, so the borrower must refinance at that point.
The major disadvantage of the HELOC is its exposure to interest rate risk.
All HELOCs are adjustable rate mortgages (ARMs), but they are much riskier
than standard ARMs. Changes in the market impact a HELOC very quickly. If
the prime rate changes on April 30, the HELOC rate will change effective May
1. An exception is HELOCs that have a guaranteed introductory rate, but
these hold for only a few months. Standard ARMs, in contrast, are available
with initial fixed-rate periods as long as 10 years.
Note: Some HELOCs are convertible into fixed-rate loans at the time of a
drawing. This is a useful option for borrowers who draw a large amount at
one time.
HELOC rates are tied to the prime rate, which some argue is more stable than
the indexes used by standard ARMs. In 2003, this certainly seemed to be the
case, since the prime rate changed only once, to 4% on June 27. However, as
recently as 2001, the prime rate changed 11 times and ranged between 4.75%
and 9%. In 1980, it changed 38 times and ranged between 11.25% and 20%.
In addition, most standard ARMs have rate adjustment caps, which limit the
size of any rate change. And they have maximum rates 5-6% above the initial
rates, which puts them roughly at 8% to 11%. HELOCs have no adjustment caps,
and the maximum rate is 18% except in North Carolina, where it is 16%.
Don't compare the APR on a HELOC with the APR on a standard loan because
they mean different things. The APR on a HELOC is the interest rate, period.
Among other things, it does not reflect points or other upfront costs, as
the APR on standard loans does. Requiring lenders to show the interest rate
on a HELOC twice is a strange way to protect borrowers, but there it is.
Copyright Jack Guttentag 2003
SOURCE:
http://www.mtgprofessor.com/A%20-%20Second%20Mortgages/what_is_a_heloc.htm
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