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Home equity loan: Cash in on your home equity

Posted on: 26th Mar, 2004 05:19 am
if you wish to utilize your home equity and use it to your advantage, you may consider taking a home equity loan (hel). whether you'd like to consolidate debts, pay for home repairs, make a big purchase or finance your child's education, an equity loan may be the right choice for you.



what is a home equity loan?

equity loan is a fixed rate second mortgage offered against your home equity which is the collateral here. since payments are almost fixed, therefore, you can plan your budget accordingly. however, you may also find equity loans with variable rates and payments.

how do you qualify for a hel?

there are 3 factors that lenders look for in a hel application. the factors given below are:
  • credit history:
  • you need to have a decent credit record along with a credit score of 680 and above in order to qualify for an equity loan. getting an equity loan with bad credit is quite tough especially if the mortgage and housing markets are in a crisis.
  • debt to income ratio:
  • lenders prefer a debt-to-income ratio below 36 percent in order to approve your equity loan.

  • loan to value ratio:
  • lenders would like to keep your total loan-to-value ratio (including first mortgage balance and equity loan) equal to or less than 80% of the home value. so, the first mortgage balance is what they'll consider when they provide an equity loan.

what rates and terms are available?

the rates of equity loan are usually higher than that of first mortgages but lower than credit cards and unsecured personal loans. the terms usually range from 10 to 30 years depending upon the loan amount.

to know what the equity loan rates are, request for no-obligation free mortgage quote from lenders and then try to compare the costs and total interest you will have to pay for each type of loan offer. you may use the mortgage payment comparison calculator (given below) to compare how much you need to pay for each offer.

how much can you borrow?

you can borrow an amount such that the second mortgage and the first loan balance combined together don't exceed 80% of the equity in your home.
let's take an example:

say you've bought a home worth $220,000 and paid $20,000 as the down payment. you've taken a mortgage worth $200,000 on your property. the equity at the time of purchase is equal to the down payment, that is, $20,000.

let's say after 5 years, your home value has accelerated to $300,000 and you've paid down $15,000 of the principal loan amount. so, you still owe = $200, 000 - $15,000 = $185, 000.

your equity in the home is then = (current appraised value – amount you owe) = $300,000 - $185, 000 = $115,000

now say, if you wish to borrow $50,000 from your equity. then the combined mortgage balance is = $185000 + 50000 = $235000, less than 80% of your current home value (that is, $240,000). so, the combined ltv is well within 80% of the current appraised value of your home.

however, there are lenders who may offer a loan equal to 125% of the home value. but for that you need to pay higher fees and rates of interest compared to what you'll pay for a traditional hel.

what do you need to pay?

you need to pay the closing costs which are almost similar to the costs in a second mortgage. some of the costs include that of property appraisal, loan application, title search etc. of course the biggest cost that you'll have to pay is the interest on the loan. you may or may not have to pay the pmi.

what are the tax benefits?

the interest on a home equity loan is deductible but only if you itemize your deductions. know more on how to deduct interest on your taxes.
cashing out equity with a fixed rate equity loan makes sense when you stay in the property for a long time. however, for a short term, say, 3-5 years, a heloc or line of credit may be a better option. if you have enough equity, you may as well as look into the possibility of a cash-out refinance. you may use the cash-out refinance vs 2nd mortgage calculator (given below) to find out which will be better for you. another option used to leverage equity is the reverse mortgage but that'll be available only if you are aged 62 and above.

what are the other benefits?

these loans offer some distinct benefits to the borrowers. some of these benefits are –

  • the rate on these loans is relatively low.
  • it is comparatively easy to qualify for this loan even with bad credit.
  • this offers you the chance to obtain relatively large loans.


There is less than 20% equity in my home but I am still looking to borrow against it. As I need to consolidate some bills which have brought down my FICO score to 525. I have had two late payments on my first mortgage 2 months ago. I need a 100% home equity loan but no lender is willing to finance at this credit score. Anyone here interested or can tell me which company would offer bad credit home equity loan?
Posted on: 01st May, 2007 02:28 am
Hi Ralph,

Welcome to the forums.

There are subprime lenders who can offer you a loan worth 125 % of the home value. At a low FICO score, you are likely to get a higher interest rate on your loan. Or else, if you can find a co-borrower or a cosigner with a high credit score, you can user the person's credit to qualify for such a loan.

Take Care
Posted on: 01st May, 2007 03:04 am
Hi Ralph.......Let me clarify a few things. With your scores chances are there aren't going to be any options for a second mortgage the cutoff for most lender is 580 for a second especially with the way the market is today. Your best and really only bet would be to try and get a cash out refi to 90% of the appraised value of the home. It would be a subprime loan and chances are rates would be in the 11% range.
Posted on: 01st May, 2007 04:00 pm
But Ckalvesmaki, is it a favorable choice to deal with subprime lenders currently? I have heard that the entire subprime market has suffered through a crisis and several lenders had to stop their business as they could cope up with the rising delinquencies and foreclosures.

Our community has discussed on this issue at http://www.mortgagefit.com/predeal/brokers-subprimemarket.html . You too can share your views in that thread.
Posted on: 02nd May, 2007 02:42 am
Just because the lender funded your loan goes out of business doean't mean the terms of your loan changes......right now guidelines are much tighter and the original OP should probably work on improving scores a little be fore attempting a refi......however there are still funding sources out there albeit with tighter guidelines and higher rates.
Posted on: 02nd May, 2007 03:24 am
Hi Guest,

Is it Ckalvesmaki? Did you have any login problems as such? Just asking because you've posted as guest. :)
Posted on: 02nd May, 2007 04:39 am
why someone will refinance the mortgage
Posted on: 30th May, 2007 01:39 pm
You can look to refinance your existing mortgage if current rates are lower than what you have on your present mortgage. This can result in reducing your monthly payments.

In my opinion you should go through the other points mentioned in this page to know if refinancing would be a wise financial move.

Miller
Posted on: 30th May, 2007 01:52 pm
I have my home located at Alabama .It's appraised for $375,000 and paid in full. We would like to shift to North carolina and we've searched for a new home, but the sale is pending. I was just planning to use the equity in my Alabama home and pay for the new home. It's worth $240,000. Then I would sell off my Alabama home and therefore loan would be paid off. Is that the right way to do this or is there any other option? My payments on the equity loan would be around $2000 and I wouldn't like to make more than a payment or two as I could sell off that home quickly. If there's any problem, should I be able to delay the payments for 60 days or so on the equity loan? What's the maximum limit to delay the loan? I wouldn't like to make a lump sum payment and then sell off the Alabama home. I would do that asap..any advice?
Posted on: 21st Dec, 2007 04:46 am
Hello Jonathan,

Have you got an estimate of how much your home at Alabama would sell for?

I think that is essential to know for whatever plans you have.

If there is any delay in making payments towards the home equity loan, that will show on your credit. If there's a 60 days delay you may get a demand or breach letter from your lender to show that the terms of the mortgage has been violated. You will get 30 days more to resolve the situation and make regular payments.

If there is any further delay, your house may go into foreclosure. That could be a risk for you.

So I think, it will be better if you can either sell off the house first and pay for the new home with the sale proceeds or else at least fix up the sale after a particular period of time so that you are aware when you may pay off the home equity loan.
Posted on: 21st Dec, 2007 11:57 pm
Hi Jonathan,

Welcome to the forum and Merry Christmas :)

I do not agree with Jenkin here. You can surely take that home equity loan to buy the house in North Carolina. And after selling the house at Alabama you can pay the loan off. The home equity loan is tailor cut maid for such reasons.

You just need to be a bit careful that you do not make any late payments.

Feel free to ask if you have any further questions.

Best of luck,
Larry
Posted on: 25th Dec, 2007 10:28 am
Hi Jonathan,

Yes, the way you have this structured would work out fine. You may want to look at a bridge loan or line of credit to delay payments for up to 6 months. You can find out more about these options at "http://www.mortgagelenders.us.com/bridge_loan.htm"

[Link deactivated as per forum rules. Thanks.]
Posted on: 06th Jan, 2008 02:31 am
I have equity worth $35000 in my home. my son wants to take an equity loan but he's not on title. Is this possible in any way? His score is 570
Posted on: 10th Apr, 2008 03:43 am
Welcome Tabitha Brown,

Your son's credit score is not too high. By the way you can use quitclaim deed to add him on the deed and then he can take the HELOC. Talk to your lender and check out if it is possible or not. By the way keep it in mind HELOC loans are generally higher in interest rate.

Let me know if you have any more queries.
Posted on: 10th Apr, 2008 04:02 am
someone with a credit score of 570 has slim chance, frankly, of obtaining financing in these times; particularly if you are talking about a home equity loan. the home equity lending market is shrinking fast, and loan possibilities are drying up minute-by-minute.

that's not to say it's impossible. you ought to check locally with a few local lenders (bank, credit union, etc.) to see what their guidelines are. i would advise you to do this prior to making any changes to the title of your home.
Posted on: 11th Apr, 2008 11:19 am
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