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- Make sure you have sufficient equity in your property to draw upon. A home equity loan is based on the equity in your house—the value of the property less what you owe on your first mortgage. For example, a $200,000 home with a $125,000 mortgage has $75,000 in equity.
- Investigate lines of credit. A home equity loan is a pure loan with established payback terms. A line of credit can be used as you wish and offers greater payback flexibility—usually a minimum payment based on how much of the credit you have accessed. If you don't know how much that wedding is ultimately going to cost, for instance, a line of credit based on a high estimate may work out best. Or if your expenses will occur over several months, as in a remodeling project, a line of credit to draw on will end up costing less than a major loan at the start.
- Contact your financial institution or insurance agent. You already have an established relationship with these organizations, and they will likely want to keep you as a customer. Contact other local banks or savings institutions that specialize in home equity loans. Ask a local real estate mortgage broker to recommend lenders. Search for a lender online.
- Find out how much you can borrow. Most home equity packages will let you borrow up to the point that your total debt—mortgage and home equity loan—reaches between 70 and 90 percent of the home's value.
- Watch interest rates. Although home equity loans are less expensive than regular mortgages, interest rates will vary. Decide if you want an adjustable or fixed interest rate. (Depending on your credit, your loan-to-value ratio and the lender you choose, you may not have a choice.)
- Keep an eye on costs. Many lenders let you set up a loan at no cost at all and may offer low "teaser" interest rates for as long as one year. Just be sure you know what your loan is costing.
The federal Truth in Lending Act requires the lender to inform you of all the terms and costs of the loan when you receive an application, including the annual percentage rate (APR). Additional costs include "points" (each point equals one percent of the loan amount), appraisal fees (for inspecting the property) and closing costs and loan initiation fees (commission for the lender). Once these disclosures have been made, the loan's terms cannot be changed otherwise the security interest in your home will not be enforceable.
- Apply. You’ll need to supply credit history, employment and income and the amount of the loan requested. There will be a review of the assessed value of the property and the amount of any existing mortgage debt on that property. Have tax returns with you when you apply.
- Complete the loan process.
Copyright © 2006 Loan Mortgage Broker Information. Send comments here.
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