All about secured homeowners loans
Written by: Peter Parsons
The purpose of this home-loan owner's 101 guide is to explain the differences between the various options available when 'releasing equity' (withdrawing money) against your house. As the largest financial commitment the average person ever makes, and probably the most important investment too, if you intend to start withdrawing cash from the equity you have in your home, you better be sure the loan is right for you! After all, you wouldn't want to lose your house, would you?
More popular now then ever, secured homeowner mortgages have become a vital tool for many homeowners, allowing them to secure their borrowing needs at what is probably the lowest interest rate available. Anecdotal evidence suggests that these rates are getting better too, some institutions are offering 'extra' cash withdrawal against your home for as little as 1.5% per annum.
By creating a 'secured debt' of this kind, in legal terms what you are doing is giving the lender a 'lien' (a priority claim) over the asset on which the loan is based. Typically this means you must clear these 'liens' before you can sell the house. These 'liens' can be attached to other assets too, and your home is not the only form of collateral you may wish to secure a loan against (some people effectively 'mortgage' works of art, expensive cars and so on). The lien side of all this is worth stressing - as a priority claim holder, the bank has the right to repossess your property if you fail to meet the payments. Basically, never take on debt you aren't sure you can service!
You can get secured homeowner loans that are variable interest rate or fixed rate (the most common until recently). More exotic variations are also available, according to www.mortgagedown.com , including capped, discounted, low-start, cash back and so on. The term of the loan can also vary, although most people tend to roll the new loan into the existing mortgage, and the term will therefore be the same as the term remaining on the mortgage itself. Fixing the rate means you pay the same throughout the term of the loan. In these times of historically low interest rates, many people think now is a good time to fix the rate. Others think rates may fall soon, and thus a variable option is better. If you are the kind of person who likes to know what your commitments will be every month, a fixed rate is probably for you. If you have plenty of spare cash-flow (i.e. you earn more each month than you can spend) a variable rate loan my be the best bet for you, as any falls in rate will be reflected in your monthly outgoings. You need to be aware that rates can also rise, though, and you must have some headroom in your monthly budget in case your payments suddenly rise.
Discounted rates are offered by banks and lenders to pull in new customers, although existing customers can sometimes benefit from them too. A discounted rate is a special rate set a certain number of points below the standard rate. As a variable rate loan, the amount you pay will vary of course as interest rates rise and fall, even though you will always be a certain level below the market rate. Some discounted homeowner loans have 'clawback' conditions - if you repay the loan early there may be penalties. A 'cashback' loan is exactly how it sounds - on completion of the loan process, you get 'cash back' to spend how you like. The rates charged on homeowner loans of this type tend to be the least attractive.
A capped loan is a variable rate loan that also promises the rate will not ever go above a certain level of 'cap'. These can be good for you if you want to take advantage of any interest rate falls, yet not expose yourself to the downside of unexpected interest rate rises, which make them less attractive, at least to staff at www.mortgagedown.com ! Once again, these loans tend to have early redemption penalties or other conditions that compensate the lender for the generous conditions.
The amount they will lend you will depend on your circumstances, as well as the property that will be used to secure the loan. Your income tends to be less important, as the lender has 'secured' the debt against your home, and will assume that you would not take out a loan you couldn't service, as your home would then be at risk. To apply, you will need paperwork such as bank statements, proof of residence, recent bills and tax returns to get your homeowner secured loan.
So what can you spend it on? Generally anything you like. A new car, home improvements, consolidating credit card bills or even a fancy holiday. Only the least prudent, of course, would attempt to pay for a 2 week vacation with a 25 year loan!
About the Author
Peter Parsons writes occasionally for www.mortgagedown.com , the place to get advice your mortgage and home owner loans
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