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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.


Yes george, a score of 570 isn't that good enough to qualify for home equity financing. And, even though one may qualify, it won't be a good enough deal isn't it? better to wait for some time, raise the score and then try for loans. But what's the reason behind the declining popularity of equity loans? may be it's due to subprime crisis and the rising foreclosures, isn't it george?
Posted on: 12th Apr, 2008 04:10 am
what we've seen almost countrywide is a decline in property values. we've also seen foreclosures like a plague of locusts. some of this can certainly be laid on the "crisis" caused by subprime lending, but our lending attitudes in the past several years became far more liberal than previously had been the case.

the new-found liberalism in our lending standards created the 100% financing situation that is so abundant in the marketplace (still). suddenly, we were allowing virtually anyone to borrow up to 100% of value on home equity loans - many of them being lines of credit that allowed repayment of interest-only. this became such easy money that people flocked to their banks, credit unions, mortgage companies, etc. to avail themselves of this easy credit.

our situation has changed radically, and equity no longer exists in many locations. as those equity line rates increased a couple of years ago, lots of borrowers discovered they were only able to make their interest payments (and even then, with difficulty). by failing to reduce their principal balance, they were eating into their equity day-by-day.

with the declining values of homes, the mindset that allowed borrowers with poor credit, questionable income and negligible reserves to obtain 80-15 and 80-20 loans; we find ourselves in a predicament that seems to worsen daily.

the 80-20 loans have pretty much disappeared. 80-15 loans still exist, in small pockets. there are, of course, lenders out there who still lend up to 100% of value on a home equity loan (small, institutional lenders predominately, i believe). but, of course, the market to whom they will lend has shrunk. no longer will you be able to march your 600 credit score into the local branch and walk out with carte blanche up to 100% of your property value. for that matter, if your value today is $250000, for example; tomorrow's value might be $240000. where does that put the lender? where does that put the borrower? the answers to those two questions are readily apparent - "in trouble."

we've seen a return to the conservatism that predominated the marketplace in years past. for 2008, this is a very good sign. we need to retrench and fix our problems before we begin to go back to the liberal attitudes of the past.

it is a sign of the times to drive down the street and see foreclosure signs peppering the yards of some of our neighbors; but it is not a welcome sign. we need to eliminate our excessive ways in order to go back to some sort of normalcy.

the "equity crunch" is real, and it only makes sense to eliminate the riskiest product lines that we lenders have offered.

i trust that some sensibility will be restored to our mortgage marketplace in the very near future. in some cases, there has been an overreaction to what is perceived to be a crisis. sooner than later, i hope, we will be able to return to normalcy (whatever that may be) and continue to do the very good things we've been known for all these years.
Posted on: 12th Apr, 2008 04:50 am
home value==400000.00
INCOME LIMITED
AGE 92
Posted on: 07th Sep, 2008 05:33 pm
REQUIEMENTS AND AMOUNT AVAILABLE
Posted on: 07th Sep, 2008 05:35 pm
Hi BZCHARLIE,

3 things are important when it comes to qualifying for a home equity loan. These are your credit history, debt-to-income ratio and the loan-to-value ratio. Know more about the qualifying criteria and how much to borrow from http://www.mortgagefit.com/home-equity.html .

Take care
Posted on: 08th Sep, 2008 05:00 am
It is very difficult ot find a lender that will do no income verification for those with limited income however there are a few lenders left.
Posted on: 16th Sep, 2008 11:44 pm
I have a first mortgage of 93,000 and a home equity loan of 13,000 and i am about to forclose on the first mortgage what will happen to the home equity loan
Posted on: 22nd Sep, 2008 06:54 pm
Hi Drmalisha8!

Welcome to MortgageFit forums!

Your question has been answered in the following link given below:

http://www.mortgagefit.com/foreclosure/first-homeloan.html

Hope this will help you.

Thanks

Jerry
Posted on: 23rd Sep, 2008 02:17 am
MORTGAGE LOAN AGINST HOME
DOCUMENTS REQUIRED
Posted on: 17th Nov, 2008 01:51 am
I HAVE HOME AT AURANGABAD MAHARASHTRA INDIA
AMOUNT 7,00,000
BUT NOW I WANT 5,00000 LOAN AGINST THIS HOME
SO HOW I CAN GATE
Posted on: 17th Nov, 2008 01:56 am
I think you should consult a bank loacted in your area. They will be able to tell you about the loan terms and other details. You may consult any financial institution as well.
Posted on: 17th Nov, 2008 04:29 am
I fear I may lose my job and I really want a "paid for" property in my portfolio. I can't figure out the best way to accumulate monies to purchase a bargain. I owe $77k on my current mortgage. I have no idea what the appraised value is now that the market has popped. I was estimated as high as $145k just before the burst but I could truly be $115k. My current interest on the mortgage is fixed at 5.5%. I have three debts...my house, student loans $20k, and $2000 left on my car. My credit score is pretty good. I'm hoping to find a second-home to serve as a rental and if I end up jobless to serve as a possible "run-to-since it's paid-for" residence. I am flying to North Carolina this Saturday to check out some jobs, properties and neighborhoods. I just haven't figured out how to pay cash for a new property or the taxing situation. Perhaps, I could purchase the home not as an individual but under a business. I recently started a side business (my losing-my-job backup plan) but it is too "new" to get a business credit line. I have a business checking account with enough money to purchase something really inexpensive. It would only be enough to purchase a distressed property or one in a not so safe neighborhood. I'm working on building business credit now. Help! I'm trying to make contingencies here that are legal, ethical and will benefit me investment wise.
Posted on: 16th Dec, 2008 06:00 pm
Hi Carolina dreaming

You have mentioned that you have 3 debts - mortgage on your house, student loans $20k, and $2000 left on my car. Before trying t purchase a new property, I would suggest you try and pay off some portions of your student loan and your car loan. This will give a positive boost to your credit report. Moreover getting a loan for a new property will also depend on your debt to income ratio. Keeping your present debts in mind, you can calculate your debt to income ratio by using the following link:
http://www.mortgagefit.com/calculators/diratio.html

In my opinion, if you purchase a distressed property or one in a not so safe neighborhood, it will be difficult for you to rent out the property. You should wait for few months and pay off some of your debts and then try to get a mortgage.

Thanks.
Posted on: 17th Dec, 2008 02:20 am
for the quick response. I would have paid off the loans and car before I was laid his past summer. Luckily, I was called backed to work but I have no faith in job security anymore. I fear if I wait I may lose my job and credit nd then not be eligible for anything. Right now, I have a job, some money in the bank, and very good credit. (((sigh))

I'm afraid to let any money go...but I'm willing to take a risk if it means I won't be homeless if I lose my job and can't find another. Perhaps, I will just pay my car off...so at least the repo truck won't circle my block like a vulture! LOL.
Posted on: 17th Dec, 2008 04:14 pm
Hi carolina dreaming!

Welcome back to the forums!

Yes, it will be a good option to pay off the car loan. Moreover it will also help you to improve your debt to income ratio. Once you pay off the car loan, I feel you will be in a better position to get another loan.

Feel free to ask if you have further queries.

Sussane
Posted on: 17th Dec, 2008 11:15 pm
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