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Is a Home Equity Loan Right For You?

Written by: Louie Latour

Home equity loans are an extremely popular source of credit. Lenders offer dozens of varieties of loans making it very easy to tap the equity in your home. If you browse the marketplace online, you will find most of these loans come with variable interest rates. Some loans are marketed with very low introductory interest rate. There are not many home equity lines that come with fixed interest rates. Many lenders charge upfront fees and large amounts at closing. Some equity loans charge annual fees and may have a large balloon payment due at the end of the loan. Equity loans that do not carry balloon payments typically come with much higher monthly payments.

As a homeowner you need to shop around for the best home equity loan that is right for you. The challenge is finding a lender that will match your needs for the best interest rate, fees, and terms. Fortunately, the marketplace is extremely competitive, and a shrewd shopper can find excellent deals. To do this you need to contact as many lenders as possible. Compare offers not just based on interest rates, but compare the fees and terms as well. Make sure you read and understand all the fine print contained in your loan contract. Don't be afraid to ask questions or haggle over terms and stipulations. Mortgage lenders need your business more than you need theirs. Demand more from your mortgage lender and you'll be amazed how far it will get you.

Before shopping for a home equity loan there are several questions you need to have answers for.

First, is a home equity line of credit right for you?

If you are in a situation where you have to borrow money in a hurry, home equity lines are a great source of credit. Home equity lines of credit offer easy access to your home equity and even tax advantages you won't find with other loans. The downside of tapping the equity in your home is that you are using you home as collateral on the loan. If the equity loan you choose comes with a large balloon payment at the end of the loan, you could place your home at risk if you are unable to make the balloon payment. If you move and need to sell the home most equity loans require full payment at the time of sale. Many home equity lines allow you to write checks against your equity; this ease of access to your money could lead to spending when you don't need to. If you are not careful you could piddle away the equity in your home with frivolous spending.

There are options available to you other than home equity loans. If you take out a second mortgage on your home you are paid in a lump sum. Second mortgages usually come with fixed interest rates making them less risky than home equity loans.

Second, consider how much you really need versus how much you can borrow.

Your home equity lender will evaluate your credit history along with your income and debt ratio. Depending on the outcome of this you may be allowed to borrow as much as 85 percent of the value of your home. Make sure you fully understand the loan terms and how the loan works.

Interest rates from home equity lines vary widely between lenders. You can save a lot of money by doing your homework and shopping from a wide variety of equity lenders. Make sure you are comparing the annual interest rate for the loans. The interest rates lenders advertise are based on interest paid. To make an accurate comparison compare all fees, including closing costs, points paid up front, and any annual fees you must pay. This will allow you to make an informed decision on a home equity line of credit or a second mortgage loan. Remember loans with variable interest rates typically come with a low introductory period. When this period is over your interest rate and payment amount could increase dramatically. Taking out a second mortgage with a fixed interest rate could shield you from surprises in your monthly payment amount.

If you decide on an adjustable rate loan, make sure you understand the periodic cap. This cap limits the amount your interest rate can change at once. Look for loans that come with lifetime caps as this will limit the amount your interest rate can change over the life of the loan. Ask your lender which index your interest rate is tied to. Indexes such as the prime interest rate are used to set your adjustable interest rate amount. Your lender will charge a margin on top of this index when setting your monthly payment amount. Finally, ask your lender if you have the option of converting to a fixed interest rate at a later time. If you do your homework up front and shop around, you can certainly find an excellent home equity or second mortgage for your financial needs.

About the author:

NoneLouie Latour has twenty years of experience in the mortgage industry as a mortgage broker. He is the owner of Mortgage Refinance Advisor, a mortgage resource site devoted to saving homeowners money with a free guidebook "Five Things You Need to Know Before Refinancing a Mortgage." http://www.refiadvisor.com

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