Finding a Home Equity Loan that Makes Sense to YOU!
written by Credit-HQ ExpertIn the days when our parents took out their home mortgages, the people who offered home equity loans were just one step up from the owner of an opium den. But we have come a long way in the financial services industry to the point that today a home equity loan is a legitimate way to help finance a big project in your life or to help you navigate a tough debt situation caused by a tough economy. But there are good points and bad points we should consider together about the many varieties of second mortgages that are available out there.
In the last ten years, home equity loans have really taken off. It has been possible for A-paper borrowers to do very well in getting interest rates as low as 4% to 5 %. So why shouldn’t people want to take a second look at getting a second mortgage? If they can help you dodge huge interest rates charged by other lenders, it just makes good financial sense.
You should know the two kinds of second mortgage loans. One is the classic “Home Equity Loan”. The other is a more flexible financial vehicle that gives you a line of credit to use with your home equity as the basis for the transactions. These are often called a “HELOC” (Home Equity Line of Credit) or a “equityline” type of loan contract.
30 Due in 15
The traditional second mortgage is different from a HELOC in that you take out the second mortgage for a one time only fixed sum of money. The schedule for paying back the loan is for an understood period of time with no variations. If you borrow a set value, perhaps $25,000, you will pay the same interest rate throughout the life of the loan and the payment will be the same each month until you pay the entire contract back.
There is also a contract that has a balloon payment involved which is called a “30 due in 15″ type of loan. The loan payments are stretched over thirty years like the traditional loan. But the contract expects you to pay off the loan in 15 years. If you have not, there is a huge balloon payment in 15 years for you to deal with. So it is a 30 year loan that is due to be paid back in 15 years.
People often turn to a HELOC because of a superior interest rate that can be had which can be used to retire high interest credit card debt. Most of these kinds of second mortgagees are the same in how they are put together. A positive about HELOC loans is that the market for them is very competitive so you can find a lender who wants your business and works to earn it. Overall, its best to go ahead and work with a lender you know and with whom you already have accounts. That trust is important when leveraging the value of your home equity. So take a look at your local bank, your existing mortgage company or even your credit union as they are often able to help you out because you are a customer already. In a pinch, the internet if overflowing with lenders who would love to give you a HELOC loan.
Keep your wits about you when you are going over the final paperwork for a home equity line of credit. Many lenders will quietly mention right before you sign that there is a prepayment penalty. That clause can really snarl up your loan so don’t sign if that is part of the deal.
One great thing about any kind of second mortgage is that the interest you pay is tax deductible. But to claim that kind of deduction , you have a tax return where you already exceed the standard dedication on your tax form. Sometimes there are limits if the interest you paid went over $100,000. So it’s a good idea to have a cup of coffee with your tax consultant before you negotiate the loan so you know what you are getting into.
There is also one type of loan to avoid at all costs. That is the kind that will advance you more than the value of your home. If a lender offers over 100% of the value of your home, avoid that kind of offer. That kind of loan doesn’t just use the equity of your home, it is seeking to destroy the equity of your home in favor of the lender.
But if you use some good common sense and only do business with lenders who are offering legitimate second mortgage loans, this kind of transaction can be a life saver when you need a big chunk of money for a big “next step” in your life.
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