Fixing up your home is one of the most worthwhile uses of the equity in your home. Not only that, but it also adds comfort and beauty to your home as well – making it even more enjoyable to live there. Several ways exist for you to be able to get access to that money that is in your equity. Here are some ways that you can get that money and some things to watch out for along the way.

A home equity loan is one that becomes a second mortgage. As such, it has closing costs and other fees that apply to a regular mortgage. This means, too that there is an approval process and appraisal costs. It is like a regular loan in that you get all the money in the loan in one lump sum and then start making payments.

These loans are usually adjustable rate mortgages. This means you have no set interest rate and it will change from month to month – or from year to year. You can also get a home equity loan with a fixed rate if you look around, which will give you a much more stable payment, but will usually be higher than an adjustable rate mortgage.

One great feature of a home equity loan is knowing how much money you have to work with – you get it all at once. This does require you to know in advance how much equity you want, or you could simply take out as much as you can get. You will want to leave at least 20% of your home’s value in equity and not borrow against it. This is so that you do not have to pay Private Mortgage Insurance. It will also leave you a margin of money in case you ever should have to move. If you leave no equity at all in your house, it may become next to impossible to sell it – and you will be left with no money for a new downpayment.

You also need to know that, as a second mortgage, a home equity loan gives you a new payment to make each month. For this reason your lender will base the amount of the loan on both your ability to pay and your credit rating, along with your total indebtedness.

The amount of time that you have to pay a home equity loan is less than it would be with a first mortgage. Often for as much as 15 years, these loans can be adjusted to the time frame you want – even up to 30 years if you want to keep your payments low. However, you should also remember that the longer you pay – the more you will pay in interest.

When you go to get your home equity loan, be sure that you shop around and get the best deal you can. Besides looking at the interest rate, you will also want to notice the fees, closing costs, and other fees that will apply. Lenders can vary greatly in their terms and fees, so you should look them over carefully to find the deal that best matches your needs.

By: Joseph Kenny

Types of scams

There are several prominent kinds of scams doing the rounds, many of which may entrap unsuspecting borrowers. Here we list out some of them:

• Equity stripping: This typically involves a practice whereby even if the borrower doesn’t have sufficient income to support monthly payments on the home equity loan the borrower is still lured into securing a loan. The reason? The lender is never interested in the ability of the borrower in making monthly payments. The final objective is to secure the home. Therefore once the borrower is unable to pay the monthly payment on the home equity loan the lender will foreclose thus taking possession of the home and the equity.

• Hiding terms of the loan/ Balloon payment: This is probably even worse than equity stripping. In such cases, if the borrower is about to face foreclosure due to inability to keep up with monthly home equity loan payments, another lender offers to come to the rescue. In this scheme, the interest rates are lower, which may entice the borrower. However payment towards the home equity loan in such cases will only involve paying towards the interest. On completion of the loan term, the lump sum of the entire principal amount is expected to be paid by the borrower. On failing to pay this amount, the loan is foreclosed and the home is taken possession of by the home equity loan lender.

• Loan flipping: This practice is very common. If a homeowner has had a mortgage for quite a few years and wishes to get some extra cash, a lender will promise to do the same by offering a refinancing option. After opting for this refinancing option, once a few payments on the home equity loan is made, the lender will call to offer a bigger loan for a larger expenditure, probably a grand vacation. The borrower goes for refinancing, without knowing that each time he refinances, his debts are shooting up. This is because of rising points and fees on every refinancing.

• Home improvement loan: This is probably more of a nightmare than a home improvement scheme. A contractor will offer to remodel and refurbish your home for a reasonable cost. The contractor will also mention that he can get the work done through a lender he knows. Once the work starts, soon after the borrower is asked to sign a host of papers. The papers maybe blank or else maybe asked to be signed in a hurry. The borrower does not get a chance to read the terms and conditions. Only later does he realize it’s a home equity loan. The contractor may or may not complete the work on the house as he has no interest now that he has got the borrower’s money.

By: Alan Lim

The difference between a home loan and a home equity loan lies mainly in that the home equity loan, also known as a second or even third mortgage, is issued at a higher interest rate. This interest rate is lower than you could expect to pay on a credit card, but it will be still higher than the original interest rate.

Use a home equity mortgage calculator to see what releasing different percentages of your equity makes to the payments required. The mortgage calculator then allows you to compare whether this is the best course of action open to you.

The alternative which may be more attractive financially is refinancing your home completely. This is where the mortgage calculator can really work for you. There are a number of options when refinancing, especially if you have a substantial amount of equity in the home. By inputting these, one at a time, into a mortgage calculator you can create a list which will allow you to clearly see which option benefits you best.

Home equity loans often seem far more attractive to the home owner than they actually are. This is because the lender is hoping to seduce you into signing your property into his hands. Find out all the details and use your mortgage calculator. See if what you calculates matches what they want you to sign for. Later you may find that it wasn’t such a good idea as your home suddenly becomes under threat of foreclosure because of some contractual obligation that you hadn’t fully understood.

Only in extreme circumstances should you even consider a home equity loan that completely strips your property of any value over mortgage total. Keep your payments affordable by using the mortgage calculator and always factor in an additional percent or two on the interest rate.

Refinancing your home is a major step, but as with a first mortgage this is the only claim on your property. If you take out a home equity loan instead, then you will have an additional lender who has a financial stake in your home. If you decide that you much prefer the terms on the home equity loan, and the mortgage calculator seems to bring it well within your budget, then make sure you read the small print carefully.

You need to know what the payments are for: are they just interest which will leave a large capital balance payable at a later date, for example? Make sure you can afford these additional monthly payments.

Here are a few don’ts that will help you in the long run:
* Don’t lie to yourself or your mortgage calculator.
* Don’t over-estimate your income under any circumstances; treat overtime money as “extra” if possible, and not part of your usual salary.
*Don’t over-estimate the equity in your home in the mortgage calculator. This can lead to false hopes which your property appraiser will quickly dispel.

If you are hoping to use the released capital to make home improvements, these should add value to your property. Look into this carefully to find out approximately how much you’ll be increasing your property’s value before committing to either the loan or having the work carried out. Failure to carry out the work means you are still responsible for the loan, but that you have not created any new equity.

By: Gerald Mason