YAERD.org Real Estate Loans Guide
Part 2 of 2:
Home Equity Loans and Home Equity Lines of Credit
Cheaper in interest and easier to obtain than Bridge Loans, Home Equity Loans are a popular refinancing option in which the borrower offers his home as collateral. As the safest loan for a lender to give, as one cannot dodge the loan by going on the lam with a single-family house in tow, Home Equity Loans generally allow for looser terms and lower interest rates than other loan types. In fact, these sometimes tax deductible loans tend to be the most easily accessible for the majority of borrowers with less than stellar credit who want large loans.
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Home Equity Loans are also more inclusive than other loans, legally implemented as financing plans for other significant expenditures, such as home renovations, buying a second home, consolidating high-interest debt, and paying for college education. Usually these loans come with fixed interest rates and longer terms than most other loans.
Home Equity Loans, however, are not without their share of risk. Using a home as collateral creates the possibility of losing the home if the borrower falls behind or cannot make payments. And scammers are exploiting the Home Equity Loan to the furthest extent, adding bogus terms to contracts that they rush potential borrowers to sign without reading.
Often, scammers encourage the borrower to claim a higher income than is true, thus inadvertently qualifying himself for a larger loan that demands monthly payments higher than he can possibly afford. In effect, the borrower surrenders him home as he signs his name. Scammers also frequently pressure borrowers to immediately sign forms that are blank or unfinished and change agreed terms for no given reason. Avoiding scams when shopping for Home Equity Loans are much the same as avoiding con artists in any other purchase: think about every offer you receive and get the opinions of trusted professionals before signing anything.
Similar to the Home Equity Loan, the Home Equity Line of Credit also uses the home as collateral when borrowing money. This financing option is not a loan, but an open line of credit available to you to draw on whenever you need it that generally provides large amounts of money at low interest rates. Usually providing certain tax benefits, the Home Equity Line of Credit provides easy access to funds. Generally, lenders allow you to borrow up to 85% (depending on your credit situation) of your home’s value minus how much you owe on the mortgage. Like any other loan, it takes a while to get approved and processed for the Home Equity Line of Credit, so it is advisable to apply for credit when you do not need it.
Home Equity Credit Lines operate on a variable interest rate and are available over a set period of time. After the allotted time has run out, some plans may demand that you repay the entire loan over another set time period while others allow you to renew the credit line. When a borrower first takes out a line of credit, a lender often offers discounted interest rates for the first six months as incentive.
Appraised Value of the Home x Percentage (up to 85%) – Balance Owed on Mortgage = Credit Limit
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Bridge Loans
Home Equity Loans
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1031 Tax Exchange
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