The definition of home equity is the market value of your home in real property, meaning the difference between your home's fair market value and what you have left to pay in all liens on the property. That amount is what we call home equity, and your home can be used as collateral to obtain a loan or a line of credit in that amount. From bank to bank, the rates and fees all vary, as well as interest rate terms. The FDIC warns against this practice, as it carries a higher risk for both borrower and lender. It is considered that if a borrower is requiring this type of credit or home loan from bank, then they are most likely already overextended and stand to default on this loan much easier. In their statement, the FDIC specifically says- " If you are a homeowner who needs money to pay bills or for home repairs, you may think a home equity loan is the answer. But not all loans and lenders are the same--you should shop around. The cost of doing business with high-cost lenders can be excessive and, sometimes, downright abusive. For example, certain lenders--often called "predatory lenders"--target homeowners who have low incomes or credit problems or who are elderly by deceiving them about loan terms or giving them loans they cannot afford to repay." The FDIC page "Putting Your Home On The Line Is Risky Business" is a must read for anyone considering on taking on a home equity loan. This link is a comprehensive resource from the FDIC to predatory lending practices and has plenty of information to protect you. The most important point to consider when pondering the home equity loan is weighing the cost versus the benefits. At any point during this loan, if you default, you could lose your home. You can lose everything you have worked so hard to get. Please deeply consider these facts before deciding to act, and shop around for the right lender, so shop from bank to bank. In determining your actual credit limit, the lender will usually consider how you will be able to repay the loan (principal and interest) by looking at your income, debts, and any other financial obligations, as well as your credit history. Most home equity plans are set on a fixed period from which you can borrow money, say 10 years for example. When the end of this "draw period" arrives, some plans allow you to renew the credit line. This is something that is often determined before the terms are agreed upon, and if your plan does not allow it, you will not be able to borrow any additional money once the period has ended. Remember, this will all vary from bank to bank, so be sure to shop around. Frequently, the lender requires payment over the same fixed amount of time, while other plans may call for the payment in full in the amount of the entire outstanding balance. Either way, the contract is almost always designed to extend the payments over a specific time frame. Once you are approved for a home equity line of credit, almost all lenders allow you to borrow up to your credit limit whenever you want. There are some lenders that require you to borrow a minimum amount each time you borrow, or keep a minimum balance outstanding. Still, even other plans may also ask that you take an initial amount at the time the loan is set up. This is what makes it imperative to shop around for the right terms and rates that fit your specific situation. What To Look For In An Equity Lender You simply must find the right lender for your needs, and the right lender with terms you can agree with. After all of the scams that have been abound in the mortgage loans, much more transparency and oversight have eased the restrictions and penalties a bit, so the loans are more consumer friendly. The difference between home equity and a mortgage is the home equity is given after you already have taken a mortgage on your house. Another difference is that the bank gives you a lump sum of the home
equity to do with as you see fit. Some time down the road, you will most likely need money to do some home repair (my roof went during the last raining season- $15000!!), or some other expense that can come along unexpectedly. These types of loans have fixed terms and interest, and are usually set to be paid back in affordable monthly payments. There are also lines of credit called HELOC- home equity line of credit- available and these are a little bit different. The neat thing about HELOCs is that you pay interest on the amount you have used- not on the entire value of your credit cap. You can even write off a large amount of the loan as a tax deduction. HELOCs have fluctuating interest rates, so be wary of the tricks that a lot of credit providers do- offer you a wonderful honeymoon interest rate only to cheat you later with higher rates that are triggered by time, action or lack thereof. Be careful and read the fine print. This line of credit can be advantageous to you if used properly. Rather than giving you the full lump sum like in a home equity loan, the bank usually gives you a credit card with a limit for the amount of the loan. Credit is not that big of a deal because the home is being used as collateral. Lastly, you should definitely research as many companies as you can before signing the dotted line. It can be a confusing process, but if you find the right agent who you can communicate with, trust, and feel good about, then you will be well taken care of. Some Tips The better your credit score, the better your interest rates. While you may get approved with a credit score of 600 or more, your interest rates may be higher than even the sub-prime rates, so be careful while looking around. My wife and I found that the more we searched for the right lender, the more we realized that the plans available to us were quite varied. With that said, one of the best tips I can give you is to avoid fees when you can. Become as educated as you can about the subject so that you know which fees are pocket-fillers and which ones you will not be able to avoid. Also be aware that like any other loans, some sharks out there put into the contracts an early pay-off penalty (why would they want to miss out on all that interest? Oh yeah, dirty sharks they are!). This can be avoided with certainty, and you could almost make that one of your first qualifying questions. Remember that they want your house, and they want to make you feel like they are doing you a favor by lendingyou money. And if you are not careful, you will lose big. So the best tip is that if you need this kind of loan, then make sure you are prepared with knowledge and an acceptance that you will be obligated to this contract. Know exactly what this loan is going towards, that way you maintain financial risk to a minimum, and responsibility to a maximum. Above all, do your research. Learn about the multitude of options that are available. By no means does anyone person have the right answer for everybody, neither, so get as many opinions as you get choices, as first-hand experience is usually the best.
Variable Interest Rates- read the fine print, and make sure that everyone is clear on what the rates will be when you continue to repay the loan on time, as well as if you default, and when the draw period comes to an end. Ask questions! Fees and repayment terms- find out if there are fees for even just applying, as well as fees for early pay-off, late payment, transaction fees every time you withdraw, fees for when the loan reaches a certain age, fees for sneezing on the contract, etc. On that last point, I am only joking, but you get the pointthese lenders can charge fees for everything, so be careful and follow the golden rule...ask questions! Amortization- in laymen's terms, this is a big, fancy word for paying down the loan. Your plan can be broken down to show how much of your payment is going towards interest, and how much is going to the principal. Ask questions about this aspect to learn whether or not any rates or fees change during your payments. The most important points to look for are the three points above- fees, interest rates, and amortization. These points should all be very clear, concise and transparent. If in doubt, have a second pair of eyes look it over, preferably a professional like a lawyer. More Information A great source for calculating terms and rates can be found on Bankrate.com, and there is also a wealth of information to learn from. For more information on home equity loans in California, please go to Equity California. Federal Reserve Information on Home Equity The FTC's Comprehensive Guide to Home Equity (the best resource online) Home Equity Wikipedia Thomas C Cumberland http://www.homeequity.webs.com