Home Loan Genius - Mortgage Loans - Home Equity Loan

To make the deal work out in your best interest, make sure that it is the right deal in the first place. Is a home equity loan a better fit for your needs than a simple credit card account? If you’re not sure, figure it out before you put your home at risk.

Depending on loan type, property type and other criteria, you may be able to borrow up to 100% of your home's value. The relationship between your loan amount and your home's value is called the "loan-to-value" ratio, or “LTV.” The relationship, expressed as a percentage, between the amount of the proposed loan and a property’s appraised value or purchase price. For example, a $75,000 loan on a property appraised at $100,000 is a 75% loan-to-value ($75,000/$100,000). As LTV's increase, the cost of the loan in question usually increases as well.

Plan out your budget ahead of time. Make sure that taking the loan will not overburden you.

Review and consider insurance to cover the payments if something happens. You may or may not need insurance. If you’re going to include it in your program, try to pay the premiums monthly—not up front.

Home equity loans are an attractive borrowing tool for many people. After all, the interest is tax deductible, the rates are usually lower than those on other types of loans and they're easy to obtain. But there can be a downside, and you should know what it is.

With a home equity loan or line of credit, you can typically borrow 80% of the equity in your home. For example, if your home is valued at $125,000 and your mortgage balance is $50,000, you could borrow up to $60,000 (80% of your $75,000 equity).

Home equity loans should not be used lightly. Keep in mind that you're putting your home up as collateral on the loan. If you fall behind on the payments, you could lose your home through foreclosure, where the lender takes ownership of the property and sells it in an attempt to recoup the money they lent you.

Many people refinance their mortgage or take out a home equity loan to take advantage of the equity in their home. They then use the money for buying a new car, taking a vacation or other expenses, counting on the house appreciating in value to cover these expenditures once they sell. If it doesn't, they owe more than the house is worth and are "upside down" on their loan.

Being "upside down" on your loan means that you owe more than your home is worth, and this can easily happen if real estate values fall.

Just because you have equity in your home doesn't mean you can afford the monthly payments of an additional loan. Be sure to do a careful analysis of whether the home equity loan payments fit comfortably into your budget.

Home equity loans are best used for home improvements that will increase the value of your home. Some improvements, such as swimming pools, don't usually increase the value upon resale. Others, such as additional bathrooms, living space, renovated or updated kitchens, etc., generally do increase the value of your home.

Older, low income, minority and other vulnerable homeowners often are not eligible for loans from banks and other mainstream lenders. Seniors, who are usually retired and live on Social Security or pensions, may not have the income necessary to borrow money without collateral.

Many senior homeowners have made years of hard-earned mortgage payments, and often own their homes "free and clear." The high rate of appreciation on real estate has in many cases left them "land rich, but cash poor."

While a home equity loan from a reputable lender may be an effective way to generate cash, homeowners have to be cautious and aware in evaluating any offer that jeopardizes the hard-earned cash value of their homes.

The bottom line is this: if your home is worth more than you owe on it, a home equity loan can be a great way to take advantage of this asset, but it can also get you into serious financial trouble, and should be used wisely.

Before taking out a home loan, ask these questions:

- How much money am I borrowing? What is the total amount, including fees and interest, that I will need to pay off the loan?

- What is the annual percentage rate of interest (APR)?

- Will I be paying a "fixed" interest rate, or will it change over time ("adjustable" or “variable” rate)?

- How does the quoted rate compare with those of other lenders?

- What fees, points and closing costs will be added on to the loan?

- Is there a "balloon" payment (a single very large payment at the end of the loan)? You may be quoted very low monthly payments. But beware. The payments may be lower because the lender is offering a loan on which you repay only the interest each month. At some point in the future the principle will be due, usually in a lump-sum payment.

- How much are my monthly payments? For how many months?

- Will I have enough to live on each month after making the loan payment? Can I really afford this loan?

- Do I really need the repairs or home improvements?

- Will I have to pay a prepayment penalty fee if I pay off the loan early or refinance with another lender?