If you have lived in your home for more than two years, it has
probably appreciated which means that you have built up equity.
What is home equity? Home equity is the difference between the
value of your home and the amount of all that you owe on your
home. If your home has an appraised value of $200,000 and all of
the outstanding liens against it total $150,000 then your home
equity equals $50,000. Often times when a home has accumulated
value, the homeowner decides to take some of that value out in
cash. Sometimes the cash is used to pay off bills, for home
improvements or for a child's education. One of the best ways to
tap the money available from your property is to refinance it
with a home equity loan.
When considering a home equity loan, there are several steps you
should take to ensure you choose the refinancing package that is
right for you.
∑ The current market for home equity loan refinancing is crowded
and very competitive. As a homeowner you probably receive
solicitations for loans almost daily via the telephone or the
mail or the Internet. Be wary of accepting any of these
solicitations without thoroughly investigating them. The best
course of action might be to initiate your own independent
search for a financial institution or mortgage broker. Also be
aware of the fact that a mortgage broker in any loan situation
is not automatically working to get you the best deal. You are
the person who should take responsibility for making sure that
the final loan product is the one you need. The Better Business
Bureau, the yellow pages, the Internet and references from
friends are all good places to start your search for refinancing
∑ You will need a certified appraisal for the actual loan.
However, it is wise to have an idea of the value of your home
before you begin the process of refinancing. There are many
online services that will give you an estimate of your home's
value. Many times home sales are listed in the newspaper. Watch
these listings for homes in your neighborhood that are similar
to yours in size and condition. Note their prices.
∑ Know your credit score. By law you are allowed one free credit
report a year. The credit reporting agencies that supply the
report generally will also offer your FICO score for a small
additional fee. There are other factors that influence your
ability to obtain a home equity loan but your credit report and
FICO score are good places to start.
∑ Once you have identified several possible sources for
refinancing your loan, have the lenders explain the different
loan products they offer. Don't be afraid to ask specific
questions and don't be hypnotized by a low interest rate. A low
interest rate alone is not sufficient reason to accept a loan
proposal. Ask about the term of the loan and the closing costs.
Make sure the lender explains any terms you may not fully
understand such as points.
∑ Let the lenders know they are competing for your refinancing
business. Sometimes a lender will sweeten your deal if there is
the possibility the it might be lost otherwise.
∑ Have all proposals submitted in writing. Take the time to
compare them and always make sure you are comparing the same
types of things. For instance, don't just look at the bottom
line number on the closing costs see what each lender is
including in the closing costs.
∑ Be alert to potential scams. Don't be intimidated by your
refinancing lender into signing anything that isn't absolutely
true. Don't sign anything that has blanks or that you haven't
∑ Know your rights. There is generally a three day penalty free
right to cancel when you refinance your loan. If something
doesn't seem correct to you, don't shy from invoking that right.
Refinancing your loan in order to access your home equity can be
a wise financial move. Your home, however, is probably the
largest portion of your net worth so proceed with caution and
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