Home Equity Can Work for You
August 20, 2008
Home equity can be a confusing notion for those who are unfamiliar with economics and finance. However, it can be broken down into terms that are easily understood by the layperson and can be used to your advantage. Home equity is essentially the amount of home that you own. This essentially means the fair market value of the home minus the debt you owe on the home. When you purchase a home and start to make payments, any portion that goes toward paying the principal on the loan builds equity. For most people, their home is the most valuable thing that they own. This value is however, inherently illiquid, meaning the value is not easily moved around from place to place like say, money in your savings account. Its value can be accessed however.
How to Build Your Equity
In order to utilize the equity in your home you must first build it. This can be a long process that occurs slowly over time. For instance, if you just bought your home, you do not have much equity if you have any at all. However, as you make more payments over time, or your home appreciates in value, your equity will grow. You can speed this process up if you wish by paying all extra income toward the mortgage every month. This will help your equity grow faster. Once you have a decent amount of home equity, you then have the option of using it if you so choose.
How to Utilize Your Home Equity
You can utilize your home equity in several ways. People typically utilize their home equity in the form of a home equity loan or line of credit. Home equity loans can also lead to tax breaks for some. Home equity loans can be used for many things but here are some common examples of how people choose to use their equity:
- Home improvement project: Many people use a home equity loan to make improvement or additions to their existing house. Be careful though, you want to maximize the return you get on your investment; do your research before you improve.
- Education: Some people choose to use their home equity to finance their child’s college education. While there are other options, if you have failed to adequately save for your child’s college fund, this may be a good option for you.
- Purchasing an Automobile: If you are concerned with having low monthly payment on your automobile this may be the right choice for you. However, beware of the lengthy term of home equity loans; you may end up paying significantly more than if you were to purchase the car with a traditional auto loan.
Additional Resources
No TagsWhich Mortgage Loan Suits You Best?
August 11, 2008
When you make the decision to tap into your home equity, there are many options available to do this. Home equity and its value are thought of as illiquid, meaning you can’t move them from one place to another as you can say with cash. If you want to utilize your home’s value, tapping into your home equity is essential. The most common ways people utilize their home equity are through traditional home equity loans or home equity lines of credit. Each loan type has its own pros and cons and it is up to you to determine which one fits your needs.
Traditional Home Equity Loan
The traditional home equity loan is often called a fixed-rate home equity loan because the APR is set and will remain the same throughout the life of the loan. This type of loan generally provides the borrower with a set amount of cash to be used for a variety of purposes. While the APR will be higher than the original mortgage rate, borrowers typically find it useful for paying off credit cards because the interest rate is usually lower. You can borrow up to 100,000 dollars with this type of loan.
Home Equity Line of Credit
This type of loan is often referred to as a HELOC. This loan operates more like a credit card and can be good for consumers who may need multiple infusions of cash over a period of time. Sometimes they actually come with credit cards. Consumers often use this for paying biannual tuition fees, annual trips, and the like. The interest rate on this type of loan is variable and will go up and down just like a credit card. The major difference is that a HELOC has a fixed term and the loan must be paid in full by the end of the term. Some consumers find this to be the most difficult part and are unprepared for the huge amount due at the end of the HELOC term.
Choose What is Right for You
Try to create a financial plan for yourself and your home equity loan. Envision what you need and want to get out of your loan. After you examine all the aspects of your financial needs and future, decide on which type of home equity loan will be right for you. Remember, home equity lines of credit are useful if you are going to need multiple infusions of cash over time. This would be a cheaper option than taking out multiple fixed rate loans. However if you have a one time expense, such as paying off credit cards or a home improvement project, the fixed-rate loan may be the best option for you. Make sure you think of all the expenses that you may need to cover so you make the right decision and take out enough money to cover everything that you plan to pay for with the loan.
Additional Resources
No TagsPrequalified or Preapproved Borrowers Have an Edge
August 4, 2008
When you are shopping for a home, the more prepared and knowledgeable you are the better. Prequalifying and getting preapproved for a home loan can make the difference between purchasing your new home and watching it go to another buyer. When you go through these two important processes, not only does it tell you more about what kind of house you can purchase, but it also lets other important people involved in the process know crucial information about you.
What do Prequalified and Preapproved Mean?
- Prequalification is a crucial first step when considering the purchase of a home. It means that you have given your lender enough information about yourself and your finances that he or she can tell you how much of a loan you can afford. This gives you a ballpark estimate of what kind of houses and locations you can pay for. You can end the process here or you can take the next step
- Preapproval is the step you take after prequalification. Preapproval requires some more paperwork but gets you preliminary approval for a loan up to a certain amount. The amount you will be preapproved for depends on your financial situation. You may have to pay a fee for processing but it is often refundable. After the previous two steps are taken, buying a home is that much easier because you have already done much of the paperwork.
How do Prequalification and Preapproval Give Me an Edge?
If you are prequalified and preapproved, your realtor will be able to whittle down your options based on your preferences and what you can afford. This will save everyone time and effort in the long run. It can also help to avoid the heartbreak that can come from falling in love with a house that you will not get approved for. Preapproval gives you the biggest edge with the seller of the home. When you let a seller know that you have already been preapproved for a loan amount, it gives you the upper hand. You will be able to effectively bargain based on the amount you are preapproved for and you will be more attractive to sellers because they know you are essentially guaranteed loan approval. When you are compared to prospective buyers who are not preapproved and still have to begin the process, you will be at an advantage because you will be able to purchase the house more quickly and decisively.
Additional Resources
home buying, Home Loan, home seller, loan preapproval, loan prequalification, Mortgage, preapproval, preapproved, prequalification, prequalified, prospective buyerBefore Co-signing on a Mortgage – Think Twice
July 30, 2008
Co-signing for a loan is nothing new. Many of us at some point in our lives have needed a co-signer. Whether it was for an auto loan, or a supplemental school loan, co-signers have been there when needed them for various expenses we just couldn’t qualify for on our own. However, with the recent tightening of lending standards a new phenomenon is coming to light. People are starting to use co-signers on home loans. This trend, though it may be helping more families purchase their own homes, carries substantial risk to the co-signer, beyond any related risk for smaller loans.
What Are the Risks?
For any loan that you co-sign, you are taking full responsibility for any payment, should the primary borrower default or is unable to pay. This means that in addition to your own expenses, which are likely substantial, you must be both willing and able to take over responsibility of payment for the person you’ve co-signed for. If we consider smaller loans, such as auto loans or school loans, this may not have a huge impact but can still be a burden. However, when we are considering a home loan which can easily surpass the hundred thousand dollar mark, the effect on a co-signer’s finances can be devastating if the primary borrower is unable to make the payment, defaults, or completely bails on the loan with no forwarding address. Any defaults or missed payments will also affect the co-signer’s credit report, making it harder to get credit and loans in the future. Also, if you are not listed as a co-owner on the property, you could end up making payments for a house that is not yours. Once you co-sign for a loan, there is no turning back. The only way to get your name off of the loan is to pay the remainder of it, or for the lender to let you off of the loan.
Should I Co-sign?
This is a decision that is entirely up to you in light of your circumstances. Now that you are aware of the risks, make sure that you are completely familiar with the primary borrower. While you may know this person well, you may not know them well financially. The way someone conducts themselves financially can be completely different and foreign compared to how you think of them on a daily basis. Become familiar with their financial history and their credit. Do not be afraid to ask them questions; after all, this is a favor you will doing for them, at a potentially substantial cost to yourself. The borrower should be more than willing to provide you with all the information you request. Be wary if they do not seem honest and upfront with you. Make sure that you will actually be able to afford the home loan payments on your own, should the primary borrower face financial hurdles.
Additional Resources
No TagsFAP838: Student loans and bank failures
July 14, 2008
Image via WikipediaFAP838: Student loans and bank failures
Listen now:
Student Financial Aid News
+ IndyMac Bank failed over the weekend, taken over by the FDIC.
+ NASFAA: “After rushing to enact a law that makes it easier for students to obtain more federal student loans, Congressional leaders and lobbyists for for-profit colleges may now be close to a deal to help those colleges avoid an unintended result of that new law,” The Chronicle of Higher Education reports. “The parties are seeking a measure to keep the colleges from running afoul of the requirement that at least 10 percent of their revenue comes from nonfederal sources. The colleges have been concerned about the requirement, known as the 90-10 rule, ever since Congress this past spring raised the limits on the amounts students may borrow under federal loan programs. One option under discussion would allow the colleges to temporarily treat the $2,000 of newly allowed loan funds as part of their 10 percent.”
+ Bloomberg via NASFAA: “Five months after the collapse of the $330 billion auction-rate securities market, bonds backed by student loans show no signs of recovering,” Bloomberg News reports. “The $85 billion of auction-rate securities sold by state agencies and private lenders to finance student loans are emerging as the most toxic type since Wall Street dealers abandoned the auction-rate market in February amid worries about the financial health of the bond insurers who guaranteed the debt. The collapse of the auction-rate market compounded the financial problems for lenders after Congress last year cut the subsidies it makes to those who sell bonds backed by federally guaranteed loans.”
+ U Ohio: Ohio Governor Ted Strickland today signed an executive order establishing The Ohio GI Promise, which changes Ohio’s residence requirements to allow all veterans of the U.S. Armed Services, their spouses, and dependents who choose to attend Ohio colleges and universities to do so at in-state tuition rates.
Scholarship Update
+ Brickfish Off Road Nation Scholarship
+ Share a photo or video of your off road excursions and be eligible for a $500 scholarship. Deadline is September 04, 2008. No purchase necessary. Open to anyone who is a resident of the 50 United States, the District of Columbia or Canada (excluding Quebec), and is 13 or older at the time of entry.
+ Details at our free college scholarship search site
Financial Aid 101
+ What happens to your student loans when a bank fails
+ I’m reasonably certain IndyMac isn’t the last
+ Your loan is sold to the new bank operator
+ Servicing typically doesn’t change all that much
+ Make sure you stay in contact with the bank as it makes the transition
+ If the bank loses contact with you, they may just classify your debt as delinquent or in default, and that is a mess to clean up
+ Remember to pull your credit report from time to time
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Reminders
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+ Financial Aid Podcast Show Notes at FinancialAidPodcast.com.
+ Free scholarship search secrets eBook at StudentScholarshipSearch.com/ebook
+ Open an FDIC-insured savings account today!
+ Private student loans available at any time - visit AlternativeStudentLoan.com
+ Student credit card information at StudentPlatinum.com
+ FAFSA form tutorials and free help at FAFSAonline.com
+ Financial Aid discussion forums
+ Get FAFSA news at the FAFSA blog
+ Stafford federal student loans at StaffordLoan.com
+ The Financial Aid Podcast is a publication of the Student Loan Network.
I want to hear from you! Email me at financialaidpodcast {at} gmail {dot} com, visit http://www.FinancialAidPodcast.com, or call 206-350-1208.
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