Clear Talk About Mortgages

20 Things To Know Before You Get a Home Equity Loan or 2nd Mortgage

Does the loan affect private mortgage insurance?

When the home equity loan and the first mortgage combined totals more than 80% of the property's value, you'll be required by the mortgage lender to pay PMI or private mortgage insurance. This insurance protects the lender in the event of buyer default, and can increase mortgage payments by more than $200.

When is the best time to apply for a home equity loan?

If looking to get a low rate on a home equity loan, apply for the loan during the fall and winter months. Because many people purchase homes and apply for loans throughout the summer, lenders tend to inflate interest rates during this period

What are your reasons for applying for a loan?

There are many good uses for a home equity loan. Common uses include home improvement, debt consolidation, wedding expenses, etc. On the other hand, some people borrow money for frivolous purchases such as shopping sprees or lavish vacations. Use the money wisely, and avoid unnecessarily creating a new debt.

Ask for a Good Faith Estimate

Loan estimates provide the borrower with information about closing costs, interest rate, and other fees. By law, the mortgage lender must forward a Good Faith Estimate within three business days of receiving your loan application. Once you get the estimate, read it carefully, and ask questions if necessary.

Future mortgage refinance

Homeowners who refinance their mortgage loan with a home equity loan are more likely to be turned down for a new home loan, or may receive a higher rate on the loan. Before refinancing, attempt to payoff the home equity loan, which can boosts your credit and let's you qualify for the best rates.

Can I cancel a home equity loan agreement?

Yes. Whether you have buyer's remorse, or decide you can't afford a home equity loan, there are options available to you. After finalizing the loan documents, you have up to three business days to cancel the agreement and get out of the loan. Make sure to cancel the loan agreement in writing.

Keep an open eye for additional fees

Don't let your mortgage lender pressure you into accepting unfavorable terms or paying "last-minute" fees added to the loan. Because some homebuyers do not completely read the loan documents, they end up paying more for the mortgage than necessary.

Are home equity loans free?

To lure business, several lenders offer free home equity loans. In other words, the lender will waive closing costs, which means the borrower does not have to pay money out-of-pocket.

Consider more than the interest rate

When applying for a home equity loan, many people only take into consideration the interest rate, and ignore other facets of the loan. Make loan comparisons and review each loan side-by-side. Even if the lender offers a super low rate, they may charge other fees, whereas a lender with fewer fees charges the highest rate.

What if I default on the loan?

Closely read the loan document and look for a default clause. Because a home equity loan is a second lien, failure to repay the loan balance may result in losing your home. The majority of lenders allow time for borrowers to catch up on late payments. On the other hand, some home equity lenders include a clause that requires repayment of the entire loan if more than one payment is skipped or submitted late.

Will I save money with a home equity loan?

Your mortgage lender will outline monthly savings, and even show you a break-even table in the event you choose to refinance. If the numbers are favorable, and you can afford the payments, then a home equity loan may be ideal.

Loan amounts exceeds property value

Home equity loans are dangerous because market shifts can result in sudden decline of property values. If the combined loan totals (first and second mortgage) exceed your home's current value, you'll owe the mortgage company money. This situation could prevent you from selling your home in the near future.

Beware negative amortization

Stay away from loans that result in negative amortization. In this situation, you'll always owe more on the loan. Interest only adjustable rate mortgages are the worst because you only make interest payments each month, but the amount due isn't always enough to cover the monthly interest payment. Every month, interest not paid is tacked onto the loan, which increases the amount owed.

Be upfront with mortgage lender

Throughout the application process, the mortgage lender may inquire about your credit past. If you have a few blemishes such as foreclosure, bankruptcy, or past judgments - be honest. The lender may be able to offer an affordable loan program designed to help borrowers make a fresh start.

Will a home equity loan negatively impact my credit score?

Even though a home equity loan increases your debt load, it will not have a huge impact on your credit – unless you refuse to pay the monthly payments on time or skip payments. To ensure a strong credit score, make timely payments and limit credit inquiries.

Get a 125% Home Equity Loan

Do you need a home equity loan that exceeds your property's value? If so, talk to your lender about a 125% equity loan. To qualify, borrowers need to have an excellent credit history and the means to repay the loan. Because a portion of the loan is unsecured, the interest rate on these loans is usually higher.

Which kinds of loans are available to me?

If looking to compare various types of loans, use a mortgage broker. Carefully weigh the good and bad aspects of each loan type, and make sure you understand the terms, rates, and fees.

Which loan is best for my circumstances?

The best home equity loan is the one that fits comfortably within your budget. Once you have the estimate, review the quoted fees, rate, terms, and monthly payment. If the loan provides you with enough money to meet your expense, and you can afford the payment, it likely the best loan for you.

Use the money responsibly

To gain the most from the loan, use the money on something beneficial. For example, make home improvements and increase your property's value. Better yet, payoff high interest credit cards and increase your disposable income. Bad uses for a home equity loan include buying a new car, or using the money to pay for monthly living expenses.

Understand home equity loan tax rules

Money from a home equity loan is not viewed as income, and you won't pay taxes on the money. However, the IRS will expect you to pay taxes on the money gained from any investments you purchase with the loan - mutual fund, IRA, brokerage account, etc.