Up Your Home for a Loan
It wasnt supposed
to be this way. They told us before the contractors started digging the foundation,
this was the "starter home." But when the family began to grow, so did
home values and remodeling proved easier than finding a decent house to buy.
Youre not alone. Home values are increasing at a record
pace across the country, prompting many homeowners to reinvest that newly gained
equity back into their homes rather than relocate. But whats the best way
to raise cash for the contractor?
Home equity loans
practice of borrowing against the value of a home has gained in popularity over
the last 10 years. According to the National Home Equity Mortgage Association
www.nhema.org, home equity loans will hit $500 billion this year compared to $34
billion ten years ago. There are three key reasons for this surge: escalating
home values, low interest and tax deductibility.
two ways to tap into the home equity of your home. The right choice for you depends
on your needs. If youre looking for a fixed, lump-sum amount, perhaps for
a major home improvement project, youre better off with a home equity loan.
With a home equity loan, the term, and usually the interest rate and monthly payment,
remain the same over the life of the loan.
If you want the
convenience of drawing against your credit line as the need arises, a home equity
line of creditalso known as a HELOCis more likely to meet your objectives.
Instead of borrowing a fixed amount of money, you qualify for a certain amount
of credit. You then can borrow up to your credit limit whenever the need arises.
The money is accessible instantly, usually by writing checks assigned to the amount
or by using a credit card issued by the lender.
of the route you take, shop lenders to get the best rate and terms. Include the
following questions when considering a home equity product and lender:
am I paying in interest? Interest rates vary among lenders, so query several and
compare the annual percentage rate (APR). Remember, the APR is based upon the
interest rate alone. For a true comparison of credit costs, compare other charges,
such as points, fees, and closing costs. If the lender is offering an introductory
"teaser" rate, be sure to find out what rate you will be paying after
the promotional period ends.
What is the index based on and
how often can it change? The interest rate on a variable-rate loan must be based
on a publicly available index. Most lenders use the prime interest rate. In todays
market, you should look for a lender that offers the prime interest rate for the
life of your loan. In any case, you shouldnt have to pay more than two points
above prime. Its also important to know how often the lender adjusts the
How much can the rate increase? Under current law, all
variable-rate plans must have a cap on how high your interest rate can climb over
the life of the plan. Most variable-rate lines of credit also have a cap that
limits how much and how often the interest rate can change during the course of
What are the closing costs? Closing costs, which may
include (but are not limited to) a title search, appraisal, attorney fees, recording
charges, and notary fees, also vary from lender to lender. With financial institutions
vigorously competing for the home equity market, you should be able to negotiate
waiving some or all of the closing costs. But shop carefully, as some lenders
impose a fee for each time you access the account, and others charge for not using
What are the repayment terms? Usually, you repay the
loan in regular installments. Paying more than the minimum monthly payment will
pay off the loan faster and reduce your costs. Check your terms, though. Early
repayment may have a penalty attached. Unless it is absolutely necessary, avoid
interest-only repayment options in which you pay on the interest during the term
of the loan and the balance is due at the end of the term. This option can prove
much more costly.
Article continued at http://www.pacreditunions.com/commoncents2001/home_loan.htm