Important Facts about Home Equity Loans
Beyond the basics – what you should know about home equity loans
The equity of your home is the difference between what your home could sell for and what is owed on your mortgage (including previous home equity loans or lines of credit). A home equity loan (HEL) allows homeowners to borrow part of this sum using the home's value as collateral. These types of loans are often sought by people looking to borrow large or lump sums and who may not have a good credit history, because creditors are more generous when they can count on the value of a home for repayment.
If you have considered taking out a loan, you may be familiar with these advantages and the low interest rates frequently given with home equity loans. However, there are some lesser-known facts that can help you decide if this is the best type of loan for you.
You have the ability to change your mind
After the initial loan negotiations have been completed and the contract has been drafted, make sure to thoroughly read it and ask questions about any unclear portions. You may not realize that there is still time to negotiate, and you are under no obligation to sign until you are satisfied.
Furthermore, if you do sign the contract and later decide that you have made a mistake, you may be able to cancel under the terms of the federal Three-Day Cancellation Rule. This law allows borrowers to cancel the deal within a three-day penalty-free window if they used their primary residence for the loan. Day one begins the day after you sign the contract and receive a Truth in Lending disclosure form along with two copies of a Truth in Lending notice regarding the cancellation policy. Cancellation is due in writing by midnight on the third business day – all days except Sundays and holidays. There are several exceptions to this law, so make sure to discuss it with your lender before signing.
"During this waiting period, activity related to the contract cannot take place. The lender may not deliver the money for the loan. If you're dealing with a home improvement loan, the contractor may not deliver any materials or start work," according to the Federal Trade Commission (FTC).
There are points and fees
Knowing the monthly payment and interest rate is important, but it won't give you the full picture of how much you will owe.
"Pay close attention to fees, including the application or loan processing fee, origination or underwriting fee, lender or funding fee, appraisal fee, document preparation and recording fees, and broker fees; these may be quoted as points, origination fees, or interest rate add-on," according to the FTC. You will end up paying more to finance the loan if points and fees are added.
You cannot borrow your total equity
Examining comparable sales in your area can give you an idea of the current market value of your home, but you will not be able to predict the amount you can borrow based on this number alone. While it is true that HELs generally allow borrowers to receive a larger sum, at a lower interest rate, than many other types of loans, there is a limit to the percentage of equity that can be borrowed. This limit depends on credit history, income and the current housing market but is typically around 85%.
They offer flexibility
The ability to receive a large loan with poor credit is not the only benefit of HELs.
"Whichever type of home equity loan you choose, it is flexible," says Dana Sparks for Home Guides by Demand Media. "While many people use home equity loans to pay for upgrades to their homes, others use them to finance their children's educations."
Equity requires maintenance
If you think a home equity loan is in your future, you can help yourself get the best deal by maintaining the condition of your home.
"For equity to hold value, you have to put some effort in," says Shauna Zamarripa, a contributor to Yahoo! Finance. "For example, updating old fixtures, keeping up with repairs and regular maintenance all play a part, and it is usually a part played to one percent of the home's value each year."
Paying early and refinancing carry risk
One of the most important pieces of information to understand before signing the contract is the penalties for not making the set payments on schedule, early payments included. If you do wish to repay early or refinance, you should be aware that points and fees may not be refunded.
"And if you refinance, you may pay more points," according to the FTC. "Points usually are paid in cash at closing, but may be financed."
If you would like to learn more about home equity loans, please give us a call to speak to one of our representatives who can help answer any of your questions and guide you through this process.