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.
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No TagsThe Adjustable Rate Mortgage
August 13, 2008
If you have entered into the mortgage process then you now realize that it is much more involved than you might have thought. You have the decision of whether you would like an adjustable rate mortgage or a fixed rate mortgage. The decision of choosing one of these is up to you, so make sure that you choose wisely. The following is a bit about an adjustable rate mortgage and how it could work out for you. Be familiar with every aspect possible in order to make that informed decision. You are only cheating yourself if you do not take your time and learn what you can do in this process.
What are the Details?
When you choose an adjustable rate mortgage (ARM) then you are opting for an interest rate that will not remain steady. With a fixed rate you get one interest rate that remains the same for the entire mortgage. When you choose an ARM, you are choosing to take the national interest rate. This means that you can have a low interest rate one month, but then can see a rise the next month. If you want to risk it a bit and try to save more money, then an ARM is not bad, just know that you could end up paying much more over the course of your mortgage. This is the main thing that you must know about when choosing the style of interest.
The Indexes Used
When you choose an adjustable rate mortgage you will link your interest rate to one of the following three indexes. The London Interbank Offered Rate (LIBOR) is the standard index that international banks will use when charging. The Weekly Constant Maturity Yield on One-Year Treasury Bill is tracked by the Federal Reserve Board and are based on yield debt securities paid by the U.S. Treasury. The 11th District Cost of Funds Index is based on interest that the financial institution in the West U. S. are paying on their held deposits.
Different Opportunities
Many people decide to choose an adjustable rate mortgage because they have the ability to choose many different ways to carry out their process. Sometimes you could even find that you could convert your ARM to a fixed rate for a fee if needed. You could try different types of interest only loans, and see if that will work out for you. You must make sure your read through what is expected of you though because most people find that their adjustable rate mortgage is more difficult to understand then a fixed rate would be.
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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.
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No TagsRoadblocks for a Home Equity Borrower
August 6, 2008
Home equity is something that you must not take for granted at any time in your house owning life. This is a great way to gain some money for other projects that you might need to take on. There are some roadblocks that you need to jump over in order to make sure that everything you want to achieve gets achieved. Know what you are getting into before you finish up the process and make sure you are putting yourself in the best position you can.
Tight Requirements
The more people that default on loans and equity the tougher it is going to be for people to cash in, which is exactly what is happening at the moment. Even people with good credit scores are beginning to default. This means that the next few years are going to be a lot tougher to get home equity loans. It might have been easier the past three or four yearsl, but that is what caused the crack in the system. Just know that you are going to really have to prove yourself and make sure that they know that everything will be alright.
Less No Doc Loans
There used to be a lot of home equity loans that were no doc loans. This means no documentation, which meant that there was no required verification of the borrower’s income strength. As you might expect these loans come with strict rules thus making the default rate of these loans a lot higher than normal. This is a risk that the borrower and the lender are not willing to take on any longer. This required a lending decision to be based on asset value, and then foreclosure was the end game if you could not pay back.
Less Piggyback Loans
If you get a piggyback loan then you are more than 40% more likely to default then those with a stand alone first mortgage. This is especially true if you have a low credit score. If you want to piggyback on a loan then you can expect that people will want private mortgage insurance to play a role in this process. You also could see that a larger down payment is needed for you to go through with this. The key is to make sure you do not default and do have not caused any extra trouble for the lender. You will then be in good shape.
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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.
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