HOME EQUITY LOANS » HELOC

Paying back loans was a struggle for many American consumers in 2010, according to a new report from the American Bankers Association (ABA). The report, released on Tuesday, revealed the overall loan delinquency rate jumped in the third quarter. This was the second straight quarter to see increases.

Loan Delinquency Rate Jumps to 3.01 Percent

It may be difficult deciding between using a line of credit from a credit card or securing a personal loan of some type to help get through the rough patch when the time comes. Every now and then people need access to money quickly to cover unexpected expenses.  Each option has both advantages and disadvantages associated with them based on what you need to use the money for and how you plan on paying back the debt in general.

What Type of Loan?

Banks usually ask you to put down 20% of the mortgage loan amount as a down payment. You may be unable to afford it, or may simply prefer to use your cash for other purposes. Regardless, if you’re not making the 20% down payment, you may be asked to purchase private mortgage insurance (PMI). The PMI cost adds a substantial amount to your monthly mortgage payment.

There is a way to avoid both PMI and the 20% down payment. It is called a piggyback loan; in fact, this situation is one of the biggest reasons homeowners take a piggyback loan.

If you are a homeowner in need of some instant cash, you may be looking into different financial options and one of them is borrowing against your home equity using a home equity line of credit. Whether you’re building an addition to your home or just paying down credit card debt, if you have equity in your home, you may be able to qualify for a home equity line of credit or take out a loan against your house. But which is the best option, a line of credit or a loan? This depends on your personal situation. Read on to see how each scenario can help you decide which option is best for you.

A home equity loan is a loan using a borrower’s house as collateral. If you’re a homeowner who is thinking about making major improvements to your home, or have some sort of a big-ticket item in front of you that you need help paying for, a home equity loan could be the right way to go to get the job done. You may also apply for a home equity line of credit through your loan.

When you, the borrower, take out a home equity loan you’re creating debt for yourself, obviously. That debt comes in the form of a lien on your home. This lien will need to be honored first if, for example, you sell the home but have not yet finished paying off the home equity loan. A lien will also be a factor should you take out any other form of loan using your home as collateral; this is because of the fact that liens automatically reduce the value of the equity you’ve put into your home.

Anyone who is looking for a home, or currently owns one, should be familiar with the pros and cons of a home equity line of credit, commonly referred to as a HELOC.

A home equity line of credit is a loan where you, the borrower, offer the equity in your home as collateral to the lender. When you do this, you get the money you’re borrowing disbursed over time, as opposed to all at once. Normal old-fashioned home equity loans give you your loan in a lump sum, which you pay off over time (along with interest, of course). With a HELOC, you will get something that’s much more akin to a credit card, with a limit that you and the lender have agreed to.

HELOCs are defined by what’s called a “draw period,” which normally run from 5 to 25 years. A draw period refers to the period of time during which you can borrow from your line of credit. Like a credit card, a home equity line of credit can be borrowed against and then repaid, with interest, as often as you like, so that if you stay on top of your payments you could be at zero balance within a few months or years of taking your first amount.

There are significant risks associated with home equity lines of credit, which are commonly referred to as HELOCs. Many people have been unpleasantly surprised by their experiences, and still others are encountering problems using their HELOCs now that the economy is in trouble. If you’re thinking about getting a HELOC you need to know as much about them as possible.

One major risk associated with a HELOC comes from the fact that they rise with the prime rate. So if the prime rate rises, you’ll see a rise in your monthly payment. HELOCs also have no limit on the amount they can increase, with most having a limit of 18%. A standard mortgage or home equity loan, by contrast, can have fixed interest rates.

When comparing the Annual Percentage Rate (APR) of a Home Equity Line of Credit (HELOC) and a standard loan, it is important to remember that they are essentially two different things. When it comes to a home equity line of credit, the APR will be the prime rate (or whichever major interest rate index your lender uses to calculate their charges) plus the lender’s margin rate. For a standard loan, the APR will be the prime rate (or other major index), period.

If you’re looking to use your home as collateral for a loan, whether in the form of a HELOC or a traditional, standard loan, you need to be aware of the way the APR is involved in both. For HELOCs, lenders will explain to you what the APR will be on your line of credit, but they very often don’t tell you about the margin they charge. That margin can double your APR – but they’ll always call the APR just the APR, not the APR with the margin. So, for example, if you’re promised an introductory APR of 4% for the first three months of your loan, which is based on a prime rate of 4%, you’ll pay an APR of 4%. The HELOC lender will also tell you at that time that when the three months are over the APR will still be based on the prime rate. What they don’t tell you is that at the end of the three months they will charge you an APR based on the prime rate, but with their margin now added – so you can go from paying 4% to 10% (even though the prime rate could still be at 4%). So you’re now paying the prime rate plus the 6% margin they never told you they’d add, because you didn’t know to ask.

Many people make mistakes when applying for a home equity line of credit (HELOC). The good news is that, as with just about everything in life, being “forewarned is forearmed.” Read on for some valuable tips on what not to do when applying for a HELOC.

One common mistake people make when applying for a HELOC is choosing the wrong lender.This is oftentimes the result of not doing enough research on the various lenders out there who are vying for your business. If, for example, you do a lot of research and come up with some competitive rates, you can bring those to other lenders and see if they will beat those offers, or at the very least match them.

People will also get carried away when it comes to requesting a line of credit, and can end up borrowing more than they can afford. It’s easy to get caught up in imagining what you could do with more and more money, but it’s also not very realistic and can really come back to haunt you. When it comes to taking on more debt it’s probably a good idea to think small and think prudent.

The average homeowner will want to take a close look at what a HELOC can do for them. There are significant advantages to getting a home equity line of credit, as opposed to a traditional home equity loan, and the choice needs to be made carefully and thoroughly. You may find that a HELOC is exactly what you need.

HELOCs offer several advantages over traditional home equity loans. First, HELOCs come with variable interest rates, which are based on such indices as the prime rate. This means that if economic conditions change, and the prime rate changes, then you could be looking at a much lower interest rate on your loan. That’s something that could really save you money.