Paraphrasing an old family quote that says “there’s gold in those hills, you could say, there’s gold in that house. As Martha Stewart would say, “it’s a good thing.”
A home equity loan can be a very good thing if you make a plan and stick to it. Home equity loans are becoming much more common and most banking companies have specific refinancing plans available for today’s consumer.
Read on and you’ll see that a home equity loan used for the right purpose and properly serviced can be a “good thing.”
A home equity loan: what exactly is it?Types of home equity loans HEL or HELOC?
There are two types of home equity loans. A regular home equity loan and a home equity line of credit or HELOC. A regular home equity loan is a lump sum loaned at a fixed rate over a period of time. A HELOC allows a customer to borrow various amounts up to a fixed amount over a period of time. A line of credit works similar to a credit card; you use it when you need it. Different states set their own laws about the limits you can borrow against your home.
The Financial Plan: Making Your Home Equity Work for You
To make a home equity loan work best for you, it’s a good idea to have a budget and financial plan. Having a budget will help you decide how big a loan you need, and a financial plan will be the blueprint for achieving your goals within that budget. Here are some suggestions on how to use a home equity loan.
1. Home improvements
You may want to increase the equity in your house by making home improvements. The first and best place to visit is a home improvement warehouse store. These stores, especially the large ones, have entire rooms set up and listed. Be careful though, husbands and wives have been known to walk into these rooms for days and when they came out they would mutter “but I liked the blue room better”.
2. Debt consolidation
Pay off all those pesky little balances that seem to have accumulated on various store and gas cards in your wallet.
3. Holidays in the sun or in the snow!
It is a matter of interest, if compared; You can find a couple of percentage points on a home equity loan that can make a world of difference. Consider a vacation south of the border or north of Canada.
Mexican or Caribbean destinations are very attractive during the winter months, but if skiing and winter activities are more to your taste, consider Vancouver, Canada. Whistler, British Columbia is one of the venues for the 2010 Winter Olympics. Shop around for the best rates and dream on.
4. A retirement savings plan
It is not an easy fact to accept, but one day we will all have to retire. Retirement planning requires good financial decision making. Many banking and finance companies offer free retirement planning advice. Some home equity loans are designed to be used for investment purposes. Talk to a trusted financial planner before you sign on the dotted line to this idea.
Loan Terms – Points to Ponder
You now have a plan and are ready to talk to a loan company. You may want to do this online to save time and maybe a few dollars. If that is the case, then it is imperative to know these terms. Before you proceed to seriously surf the web, here are a few you’ll want to familiarize yourself with before considering a home equity loan. These points to ponder are:
Equity
Equity is the appraised value or fair market value of your home minus the outstanding balance on the mortgage.
mortgage broker
A mortgage broker is the “middle man” you pay to negotiate the best deal. This person has access to current financial information and can be very important if financial knowledge is not your strong suit.
HELOC
A HELOC is a home equity line of credit. This term is discussed in types of home equity loans.
debt consolidation loan
Over the years, as you’ve paid off your house, you may have also acquired a few credit cards along the line. These credit cards include gas cards, store credit cards, and some bank credit cards. Interest rates on these cards vary, and you may find he’s paying through the nose for the convenience of a store credit card. That’s where a home equity loan can come in handy. You can borrow the amount you need to pay off each card and make one payment each month. With current financing plans, a payment at the end of the month is less than the minimum payment required on each card. Once you’ve done this, get out your scissors and cut up all the cards except a bank credit card for emergencies. Remember the plan!
balloon loan
This type of loan can be difficult. The first payments are low with low interest rates. However, the last installment is exactly as the name describes; a balloon. That is a very large payment at the end of the repayment period. It is essential to stick to your financial plan because, in this case, you may need another loan to pay the lump sum.
Interest rate
The periodic fee charged for a loan. This is expressed as a percentage point and some financial institutions are offering approximately 5.6% on a $150,000.00 thirty year fixed home equity loan. The lower the interest rate, the better the deal, but make sure you’re not negotiating a balloon loan.
transaction fee
Unfortunately, no matter how good a deal you get on the loan, there is no free ride. In the business of credit management, someone has to make money for home equity loans to exist. There will be some type of transaction fee built into the loan application. Lenders have costs and these costs are passed on to the consumer as a transaction fee. Depending on the loan company you decide to use, the transaction fee may be lower or higher, so be sure to shop around.
FICO Score
A sliding scale based on a score created by the Fair Isaac Corporation. This score is used to determine a borrower’s behavior and potential risk factor.
credit rating
Using the FICO score-based point system, a credit score can range from poor to excellent. With a good to excellent FICO score, a person’s credit score can determine how much money can be borrowed and what interest rate will be charged.
Refinancing: Finding a Goldmine in Your Home
Many people consider their home to be their castle, but few consider that they could be living in a potential gold mine. If she has lived in your home for 10 years and has been making payments, especially bi-monthly payments, she has built up a considerable amount of equity. Combine that with a good FICO score and there is indeed gold in that house.
What is your Fico?
Mortgage brokers use a FICO scale to determine how much money you can borrow against your home and at what interest rate you can borrow this money. This number is between 300 and 850 points and shows a person’s credit history.
This scale was developed in California by the Fair Isaac Corporation, a global decision management company. A credit score of 700 points is considered “good” and based on a $150,000.00 thirty-year fixed mortgage, your interest rate would be 5.7 percent VS 9.3% if your FICO score was less than 600 points. Having a high FICO entitles you to borrow more money at a better rate.
Improve your physique
You’ve taken the test (which is available on most lenders’ websites) and your score isn’t as stellar as you’d hoped. There are a couple of ways to improve this score:
1. Pay all your bills on time.
2. Keep a small balance on a credit card to keep it “active.”
The FICO website gives you all the “who, what, where, when and why” of the two tips above. You can read about the justification in great detail on that site.
Buyers Beware
With today’s credit options and good credit, you can borrow a lot of money against your home. This ability, if not used responsibly and with a good solid financial plan, can be ruinous. Some borrowers have gone crazy and eventually had to declare bankruptcy. So beware of potential risks.
Mortgage loans: a golden opportunity
As you can see, a home equity loan is a great way to improve your living space, go on vacation, plan for your retirement, or pay off some debt. With the right combination of a good FICO Score and proper planning, there really is gold in that house.
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