The home equity loan represents a type of financial instrument that allows homeowners to make use of a loaned amount by providing their home as collateral. This type of loan is beneficial when it comes to funding major expenses such as medical bills, renovation of houses, or the payment of college tuition. The collateral is the property that you pledge as a guarantee that you will pay off your debt. If the borrower, for any reason, fails to pay off the outstanding balance, then the lender has the right to take possession of the property. The equity is basically the true value of ownership the homeowner has on the property. Then, the homeowner’s equity is whatever is left after the outstanding mortgage is deduced from the market value of the property.
Variable vs. Fixed Rates
Home equity loans are in the form of fixed rate or adjustable rate mortgages. With fixed home equity loan rates, the interest rate is set for the term of the loan. In simple words, the home equity loan rate will remain the same for the full term of the mortgage. Fixed rate mortgages are more popular and close to 75 percent of all mortgages will be fixed rate ones. With adjustable rate mortgages, also referred to as ARM, the interest rate is not set but varies depending on the indexes used. The various creditors will use different indexes to determine the adjustable rate. Some of these are the treasury bills and notes and the interest rate on jumbo certificates. You can make money in real estate using home equity loans, and this article will show you how.
Home equity loan rates are typically lower compared to various forms of consumer credit. Some creditors also offer hybrid loans which are much like home equity lines during the first couple of years and are then turned into home equity loans. If the creditor wants to convert a variable rate loan to a fixed rate one, that may be to the disadvantage of the borrower in case the variable rate is lower. The borrower will want to stay with the low rate rather than see it head higher. If that is not an option, but there is a period in which to convert, there are two options. One is to convert now and lock in a lower fixed rate. The other is to postpone that and keep the low variable rate as long as possible. It is best to review the loan documents and see how the creditor determines the fixed home equity lone rate when converting from variable one.
It is better to opt for fixed home equity loan rates if you plan to consolidate loans, especially high interest rate debt such as credit card debt. Fixed rates are also a better option if one plans to use home equity loan as down payment, be it on an investment property or for a second home. Payments on the home equity loan, if the interest rate is fixed, may be tax deductible.
Finding the best home equity loans
Finding the best home equity loan can save you a lot of money, so it is wise to shop around. Check the Borrower’s Bill of Rights to avoid unethical creditors. Look for a range of sources such as banks, brokers or credit unions, making sure your credit score is accurate.
