To paraphrase an old familiar quote that goes “there’s gold in them there 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 formulate a plan and stick to it. Home equity loans are becoming much more common and most banking companies have specific re-financing plans available for today’s consumer.
Read on and you will see that a home equity loan used for the proper purpose and managed correctly can indeed be a “good thing”.
A Home Equity Loan – Just what is it?Types Of Home Equity Loans HEL or HELOC?
There are two types of home equity loans. A regular home equity loan and the home equity line of credit or HELOC. A regular home equity loan is a fixed sum borrowed at a fixed rate over a period of time. A HELOC allows the client to borrow various sums up to a fixed amount over a period of time. A line of credit works in a similar way as a credit card; you use it when you need it. Different States set their own laws on limits you can borrow against your house.
The Financial Plan – Making your home equity work for you
For a home equity loan to work best for you, it’s a good idea to have a budget and a financial plan. Having a budget will help you decide how big a loan you need and a financial plan will be the map to accomplish your goals within that budget. Here are a few suggestions on ways to use a home equity loan.
1. Home Improvements
You may want to build up 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 whole rooms set up and priced. Use caution however, husbands and wives have been known to have gone into these rooms for days and when they came out they were muttering “but I liked the blue room best.”
2. Debt Consolidation
Pay off all the nagging little balances that seem to have accumulated on various store and gas cards in your wallet.
3. A holiday in the sun or snow!
It’s a matter of interest, if you shop around; you may find a couple of percentage points on a home equity loan that can make a world of difference. Consider a holiday South of the border or North to Canada.
Mexican or Caribbean destinations are very attractive during the winter months but if skiing and winter activities is more to your liking then consider Vancouver, Canada. Whistler, British Columbia is one of the locations that will host the 2010 Winter Olympics. Shop around for the best rates and dream on.
4. A retirement Savings plan
It’s not an easy fact to accept but one day we will all need to retire. Planning for retirement requires good financial decision making. Many banking and financial 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 signing the dotted line on this idea.
Loan Terms – Points To Ponder
Now you have a plan and are ready to talk with a lending company. You may want to do this on the Internet to save time and maybe a few dollars. If that is the case then it is a must to know these terms. Before you proceed to do some serious web surfing here are a few you will want to become familiar with before you consider a home equity loan. These points to ponder are:
Equity is the appraised value or Fair Market Value of your home less the outstanding mortgage balance.
A mortgage broker is the “go between” whom you pay to negotiate the best deal. This person has access to current financial information and can be very important if financial savvy is not your strong suit.
A HELOC is a Home Equity Line Of Credit. This term is discussed under types of home equity loans.
Debt Consolidation Loan
Over the years as you have paid off your home, 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. The interest rates on these cards vary and you may find that you are paying through the nose for the convenience of a store credit card. That is where a home equity loan can be very handy. You can borrow the amount you need to pay off each card and make one payment each month. With current financing plans, one payment at the end of the month is less than the minimum payment that was required on each card. Once you have done this, get out your scissors and cut up all of the cards except one bank credit card for emergencies. Remember the plan!
This type of loan can be difficult. The first few payments are low with low interest rates. The last payment however is exactly as the name describes; a balloon. It 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 off the balloon amount.
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 thirty year fixed $150,000.00 home equity loan. The lower the interest rate the better the deal, just make sure you aren’t negotiating a balloon loan though.
Unfortunately no matter how good the deal on the loan you get, there is no free ride. In the business of credit management someone has to make money in order 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 along to the consumer as a transaction fee. Depending on the loan company you decide to use, a transaction fee can be lower or higher, so make sure you shop around.
A sliding scale based on a point score created by the Fair Isaac Corporation. This score is used to determine a borrower’s behavior and potential risk factor.
Using the point system based on the FICO score, a credit rating can be anywhere from poor to excellent. With a good to excellent FICO score, a person’s credit rating can determine how much money can be borrowed and what interest rate will be charged.
Re-Financing – Finding A Gold Mine In Your Home
Many people consider their home to be their castle but few consider that they could be living on a potential gold mine. If you have lived in your house for 10 years and have been making payments, especially bi-monthly payments, you have built up a considerable amount of equity. Pair that with a good FICO score and there is indeed gold in that there house.
What’s Your Fico?
Mortgage Brokers use a FICO scale to determine the amount of money you can borrow against your home and at what interest rate you can borrow this money. This number is between 300 – 850 points and showcases a person’s credit history.
This scale was developed in California by the Fair Isaac Corporation, a global decision management company. A credit rating of 700 points is considered “good” and based on a $150,000.00 fixed thirty year mortgage, your rate of interest would be 5.7 percent VS 9.3% if your FICO score was below 600 points. Having a high FICO entitles you to borrow more money at a better rate.
Improving Your Fico
You’ve taken the test, (which is available at most lenders websites), and your score is not as stellar as you had hopped it would be. There are a couple of ways to improve this score:
1. Pay all your bills on time.
2. Keep a small balance on one credit card to keep it “active”.
The FICO website gives you all the “who, what, where, when and why” of the two above suggestions. You can read about the rationale in great detail at that site.
With today’s credit options and a good credit rating, 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 gotten over their head and ultimately had to file for bankruptcy. So beware of potential risks.
Home Equity Loans – A Golden Opportunity
As you can see, a home equity loan is a great way to improve your living space, go on a holiday, plan for retirement or pay off some debts. With the right combination of a good FICO score and proper planning, there really is gold in that there house.
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