Home Equity Loan Questions
I am sure many of you have home equity loan questions. For many home owners who have managed to accumulate a substantial amount of equity on their property, a home equity loan is a fast and convenient means of raising some extra finance. Banks and credit companies are usually ready to lend money on the equity of their property, simply because they know that if their borrower fails to meet their monthly commitments they hold that part of the property as collateral against the loan. Having said that, if the money is used wisely, it is still a very effective means of raising capital. This raises a number of questions dealing with home equity loans. If you fit in to the category of someone who might have sufficient collateral and a good reason to want to borrow some money against your property, then a basic run down on how to apply for a home equity loan and what it means are as follows: 1. A home equity loan is a loan against the equity in a property. In other words if you own a home worth $100,000 and you have a mortgage on it of $60,000 then you have an equity of $40,000.
Banks, and especially lately, are really not inclined to lend money against the full and current market value of the property. They prefer to lend no more than around 70-80% of the property value. That means it would be reasonable to expect a loan of around $15,000 against a scenario laid out above. 2. Some banks will take a proportion of the equity value of your property as collateral of an overdraft. This can be quite convenient as the borrower only pays interest on the loan and not the principal. This can work well in the short term. However, in the long term, it can be non cost effective. 3. Banks are pretty unwilling to lend money to people who appear to have no specific reason for borrowing the money. The will encourage people to borrow money to improve the value of their property for example. By doing so they are reducing their risk. On the other hand, they are less happy to hand out equity based loans on items such as cars, electrical appliances or furniture. These are depreciating assets and loans to purchase such items should be short term. Any self respecting loan officer would dissuade you from taking an equity loan if you said you needed a good holiday, or wanted to give your daughter a Hollywood style wedding. Despite that fact, banks will rarely refuse a loan where there is equity as collateral. Banks are becoming increasingly uncomfortable about awarding equity loans or second mortgages as they are sometimes known. People who apply for these loans need to fully understand the implications, that they are putting their homes at risk. In the last few months, many people have applied to banks asking for an equity loan to pay of existing short term debts, and spread their borrowings over a much longer period and at a considerably lower interest rate. Banks are more inclined to be sympathetic in these circumstances, especially if they are already holding a mortgage on the property. These are just some of the home equity loan questions you might have and hopefully they have been answered satisfactorily. |
