Financing a Second Home? Use a Home Equity Loan

Financing a Second Home? Use a Home Equity Loan

When you take out a loan to buy a second home, banks will scrutinize your credit reports and income documentation very closely. They want to ensure that you have sufficient income to meet all your obligations. But if you have a good credit score and a valuable first property to use as collateral, getting approval for a home equity loan is usually an easy process, and may be a less expensive and speedier one than opting for a traditional mortgage loan.

Advantages of Home Equity LoansBy using a home equity loan, you may be able to avoid some of the closing costs associated with originating a completely new and separate mortgage. There are also specific tax benefits, in the form of deductible expenses, which are allowed for those who take out home equity loans.

If you do a little homework and crunch the numbers, you may discover that a second home is less expensive than you thought, and comes with interesting perks. One of the best benefits is that you can rent out your second home to tenants when you're not using it as a vacation property for your own family.Second Home for Income ProductionA second home can actually help you earn extra income.

If you buy from someone who rented or leased the house for profit, you can prepare a financial statement based on the past income history of the property and show it to your lender. By reviewing the records, a bank or mortgage company will see that the property will probably not be a financial liability, but may actually add extra net income to your bottom line.You may also want to hire a professional appraiser to do an objective market analysis of the property.

By comparing it side-by-side to similar income-producing properties in the same neighborhood, an experienced appraiser can ascertain a home's future income potential with remarkable accuracy.If you're fortunate enough to be able to afford a second home, you're smart enough to investigate a variety of ways to pay for it. A home equity loan may be the most intelligent way to go. To paraphrase an old expression, "Home is where the equity is".

Is the 125 Percent Home Equity Loan Right for You?

In an age when athletes give 110 percent, it's not surprising that banks are giving 125 percent. But there are few loans as notorious as the 125 percent home equity loan. And for good reason. Borrowers who have been sucked into the loan's clutches find themselves with much more than quick cash. They're also stuck with an extremely high interest rate and a home that, if sold, could leave them deeper in debt.

So how did such a scary little critter creep onto our financial landscape? To answer that question, you need to understand the 125 percent home equity loan.

Crash course in loan-to-value ratio (LTV)
A lender calculates LTV by dividing a loan amount by the property's appraised value. For example, if you have an $80,000 mortgage, and your home is worth $100,000, your LTV is 80 percent. Generally, loans with high LTVs will command higher interest rates. A lender has to consider how much it would cost to recoup its money if it were forced to foreclose on a house. The lower LTV ensures that a lender can get some equity out of the deal; there's no such guarantee, however, with a higher LTV loan.

With a 125 percent home equity loan, the lender actually lends you more than your home is worth. Because the LTV is sky-high, the loan comes with exorbitant interest rates (13-18 percent and higher) and booming monthly payments. Also, as you cross over the 100 percent LTV threshold, the government no longer allows you to write off the interest payments on your taxes.

Perhaps the biggest reason to avoid the 125 percent home equity loan is that you may be unable to sell your house if you want to move. Remember, you've borrowed more than your home is actually worth. If you want to move into a bigger, or even comparable, house, you'll need to pay off that extra debt you've incurred from the larger loan.

When the 125 percent home equity loan is right
When does this type of loan make sense? It may be an option if you're in dire financial straits as the result of an unforeseen medical emergency or some other severe setback, and the alternative would be to lose your house. A word of caution, however-if you do decide to take the loan, make sure you have a rigorous, disciplined payback plan. If you don't, you could easily fall victim to the downside that comes standard with every 125 percent home equity loan.

Home Improvement Time

HELOC or Home Equity Loan?

A home equity line of credit-or HELOC-works like a credit card. Moreover, you can access it by using a card, a check, or some other means, depending upon the lending institution's policy. A HELOC is simple to establish and doesn't require the kinds of closing costs that accompany a first mortgage. The lender, in principle, promises to lend you a certain amount of money, and the loan begins the moment you draw any of the available funds. You can use the money as you please, and the interest rate is adjustable. A good choice for a home improvement project, the HELOC is particularly attractive when interest rates are low or in decline.

Rising rates and HELOCs
These days, following a long period of extremely low interest rates, the Federal Reserve is gradually hiking rates. What's more, all indications are that this policy of escalating costs for capital will continue for the foreseeable future. In an environment of higher interest, it often makes more sense to borrow money with a home equity loan, or second mortgage, instead of a HELOC. The benefits are numerous: many of the costs and interest payments are tax deductible; you can pay back the loan over a long period of time; and best of all, the interest rates are fixed, not adjustable.

The attractive home equity loan
With low rates still available (but probably not for long), people embarking on home improvement projects may find the home equity loan to be the most attractive option on the market. Whether you're considering a landscaping makeover, a new roof, or just a few fresh coats of paint, the best tool in your financial toolbox this summer may be the home equity loan.
Home improvement projects improve the quality of your life while you live in your home. At the same time, they are a sound investment for the future, because they add to the market value and equity of your property.

If you've been waiting to improve your home, this long, hot summer may be just the time to make the improvements that will make the long, cold winter more bearable and, potentially, more profitable.

Pay off Your Mortgage with Home Equity Loan

Home equity loans are sometimes ideal for those who have small balances remaining on their mortgages and want to avoid the cost associated with refinancing. If you only owe a few thousand dollars and can pay that all off at a lower rate without high fees, it can be a clever financial tactic.

Better than a mortgage refinance
Consider this scenario: A homeowner has property worth $300,000, and a 30-year, 8.5 percent conventional mortgage with an outstanding balance of only $30,000. If the homeowner decides to refinance in order to drop to a lower 6 or 7 percent rate, the mortgage refinance fees alone might cost five to 10 percent of the amount of the remaining balance. This would make a mortgage refinancing an unwise choice.

One smart solution to this problem would be to use a home equity loan and borrow the 30 grand. The mortgage can be entirely paid off without incurring steep refinance fees, and the process for securing the funds is relatively simple and fast when compared to ordinary refinancing.

Home equity loans are available from most lenders, and they can be paid off gradually, over a period of decades. For those who owe a relatively small amount on a high interest rate mortgage, converting to a home equity loan to pay off the balance may be a great way to save substantially over time, while also reducing the life of the loan. If you plan to retire in 15 years, for example, you can schedule the payoff of your home equity loan to coincide with retirement, in order to retire with extra savings and no house payment.

The versatile HELOC
Another alternative is to use a home equity line of credit, or HELOC. The big advantage with a HELOC is that, generally speaking, only payments of interest, not principal, are required during the first few years of the loan. That can significantly reduce monthly payments, in a similar way to the popular "interest only" mortgages. A HELOC will carry an adjustable rate, however. For those who expect rates to continue to rise and want to pay over a long period of time, a home equity loan with a fixed rate is a more predictable and worry-free option.

Paying off your mortgage with a home equity loan may seem strange. But in some circumstances, it may pay not to be a stranger to good financial sense.

Financing a Second Home? Use a Home Equity Loan

When you take out a loan to buy a second home, banks will scrutinize your credit reports and income documentation very closely. They want to ensure that you have sufficient income to meet all your obligations. But if you have a good credit score and a valuable first property to use as collateral, getting approval for a home equity loan is usually an easy process, and may be a less expensive and speedier one than opting for a traditional mortgage loan.

Advantages of Home Equity Loans
By using a home equity loan, you may be able to avoid some of the closing costs associated with originating a completely new and separate mortgage. There are also specific tax benefits, in the form of deductible expenses, which are allowed for those who take out home equity loans. If you do a little homework and crunch the numbers, you may discover that a second home is less expensive than you thought, and comes with interesting perks. One of the best benefits is that you can rent out your second home to tenants when you're not using it as a vacation property for your own family.

Second Home for Income Production
A second home can actually help you earn extra income. If you buy from someone who rented or leased the house for profit, you can prepare a financial statement based on the past income history of the property and show it to your lender. By reviewing the records, a bank or mortgage company will see that the property will probably not be a financial liability, but may actually add extra net income to your bottom line.

You may also want to hire a professional appraiser to do an objective market analysis of the property. By comparing it side-by-side to similar income-producing properties in the same neighborhood, an experienced appraiser can ascertain a home's future income potential with remarkable accuracy.

If you're fortunate enough to be able to afford a second home, you're smart enough to investigate a variety of ways to pay for it. A home equity loan may be the most intelligent way to go. To paraphrase an old expression, "Home is where the equity is".

Versatility of HELOCs

Your home's equity can be one of the best ways to find capital when funds are scarce. And the best way to tap into this equity is with a home equity line of credit (HELOC), which gives you the flexibility of a credit card and the tax-deductions of a mortgage. Since a HELOC allows you to draw funds for myriad reasons, it has become the Swiss Army Knife of financial instruments.

One credit line, many uses
Popular reasons to tap a home's equity include home improvement, debt consolidation, a second home purchase, vacations, and college tuition. Many small business owners will opt to use a HELOC instead of applying for business loans, because the process is easier and less expensive.
In recent years, debt consolidation has proven to be an extremely popular use for the HELOC. It can drastically reduce a borrower's monthly payment by offering lower interest rates than credit cards. On the flip side of the coin, people who are debt-free often use the HELOC to buy a car, taking advantage of the tax-deductibility of the interest payments.

Rainy day fund
It's a basic rule of thumb to keep three to six months of living expenses stowed away in a liquid account as a rainy day fund. Even though it's a great savings habit, consumers are forsaking savings, and using a HELOC as a source for emergency funds. If you choose this route, make sure the lender you select doesn't charge a fee just to keep the line of credit open. Just because you have a rainy day fund doesn't mean the institution should rain on your parade.

Fee Free
HELOCs can be fee-free. Avoid a lender who wants to charge you for writing checks or proposes exorbitant closing costs. Some lenders might require an appraisal; but there are plenty of lenders who will waive the appraisal fee. The cost of writing checks should also be free of charge.

Convert to a fixed-rate loan whenever you want
Since HELOCs are tied to short-term interest rates, they may rise suddenly. If they do, you may find that a fixed-rate home equity loan can save you money in interest payments over the long-term. If you choose to convert, expect a higher monthly payment. There may also be additional closing costs, so do the math to see if this move is right for you.

These features, as well as caps on interest rate increases and no prepayment fees, are all versatile benefits that underscore the HELOC's Swiss Army Knife reputation. About the only thing you can't do with it is whittle, or use it to spoon up beans by the campfire. Short of those tangible benefits, the HELOC could be the versatile borrowing tool for just about anything you need.

Home Equity Line of Credit

How Much Should You Borrow?

If you need extra cash, a home equity line of credit may be the right instrument for you. It gives you the flexibility you need, with minimal closing costs and the option to pay interest only for the first five to 15 years. However, you must decide the amount that's appropriate to borrow.

Setting Your Limits
The HELOC limit depends on how much equity you own in your home. Let's say the house appraises at $200,000. If your first mortgage balance is $80,000, your equity is $120,000. A second loan that's secured by this equity, such as a home equity loan or a home equity line of credit, can usually have a credit limit as high as 80 or 90 percent of this equity. For our example, we'll opt for a 90 percent HELOC, which would enable you to apply for a maximum credit line of $108,000.

One very important thing to remember is that a home equity line of credit is not a traditional loan. You don't apply for a loan amount, technically speaking, but rather for a credit limit. Once the credit line has been approved, you can treat it like a credit card. Borrow the money when you need it, and replenish it when you can. In the meantime, all you need to pay is interest on the amount you borrow. You're under no obligation to borrow every last cent of that line of credit-though you can if you need to.

How To Use Your Credit
It may be best to simply apply for the maximum amount that you qualify for. This way, you have a cushion to protect you in case of emergencies. You may not need all of that money now, but it's there if you need it later. Closing costs for HELOCs are minimal. However, many states require that you pay a one-time mortgage tax at closing. The higher the credit line, the higher the tax. As a result, you may not want to opt for the maximum amount.

There also may be direct benefits to establishing a high credit line, even if you don't plan to use most of it. Credit bureaus like seeing lots of available credit that you haven't used. A largely unused HELOC may, therefore, improve your credit score.

Once you're approved for your credit line, you still don't have a license to go out and spend it all. Every dollar spent will eventually have to be repaid-with interest. Get the highest credit limit you feel comfortable with. Then be disciplined about how you use it. Your wallet will thank you later

Using a Home Equity Line of Credit for College Tuition

There's nothing as exhilarating to parents as the thought of their child heading off to college. But it can be equally depressing financially. That's because college tuition rates are skyrocketing. Annual tuition increases of nearly 10 percent at public universities are easily out-pacing inflation's long-term 3 percent average yearly increase. Tapping into retirement accounts for tuition might jeopardize retirement plans. As a result, parents are turning to HELOCs for tuition help.

Say Hello to a Home Equity Line of Credit
A HELOC is a line of credit borrowed against the equity on your house. It differs from a home equity loan in that you don't need to borrow the entire lump sum at once. You borrow the money when you need it. Suppose you need $3,000 for tuition, and you have a $10,000 home equity line of credit. Simply take out the $3,000, which allows you to avoid paying interest on a large, lump-sum loan.

The interest rate on a home equity line of credit is adjustable, and generally tied to the prime interest rate. If the prime rate go up, so does your interest rate. However, the prime rate is generally not as volatile as some indices, and many HELOCs can be converted to a fixed-rate loan if you can't stomach the interest-rate uncertainty. And you can take heart in knowing that the interest you pay on a home equity line of credit is tax deductible.

Flexibility Today, Retirement Tomorrow
The beauty of the HELOC is its flexibility. Basically, the closing costs are minimal to open a home equity credit line, and access to funds is simple. Write a check, or perform a web-based transfer through your financial institution. Presto, you've got college tuition covered.

There's also a growing school of thought that believes that using a HELOC for college tuition is a prudent move if your college savings are coming at the expense of your retirement funding. Keep in mind that if you have many years between now and retirement, you can always earn more money to pay off a HELOC. No one, however, will lend you money to fund your retirement.

When you're considering how to pay for your child's college education, do plenty of research and find out how much you'll need to save. If you can save plenty for retirement and sock away a little each month for the rapidly expanding tuition, you're in a good spot. But if you find that you need to borrow money, the flexible HELOC might be just the ticket to help finance your child's college adventure.

Using a Home Equity Line of Credit to Reduce Debt

A home equity line of credit is a loan that is taken against the equity in your home. In practice, however, it operates more like a credit card than a mortgage. The collateral on the loan is your house and, depending upon where you live, local lending laws will regulate how much you can borrow.

The interest charged on a HELOC is usually equal to the prime rate plus an additional amount charged by the lender. The better your credit rating, the more attractive the interest rate generally will be. Therefore, it pays to shop around and find the best deal in town. At MortgageLoan.com, we can help you connect to a lender who can help you meet your specific needs.

Home Equity Line of Credit vs. Credit Cards
How is a home equity line of credit different from a card line of credit? First, you're borrowing against the equity in your house. Whereas your credit card limit might top-out after you spend a few thousand dollars, a HELOC might be worth almost as much as your house. If, for example, your home equity line of credit is $150,000, you can borrow that amount and use it for whatever you want.

Your HELOC will have an adjustable rate, and the rate is normally calculated based on the going rate at the time you withdraw funds. You decide when you want to use the HELOC, and then access your credit line by writing a check or using a special debit card.

Debt Consolidation through a HELOC
One of the most popular uses of a home equity credit line is to consolidate high-interest credit card balances, and pay them off before the penalties, interest payments, and annual fees become an unwieldy burden. Many homeowners go into debt while paying for necessities, like furniture, landscaping, and appliances. Soon, they have maxed-out their credit cards, and the outrageous interest rates charged by credit card companies accelerates until the debt is out of control. By using a HELOC, it's possible to pay off all credit cards, and replace them with a single, easy-to-manage loan. And the HELOC can be paid off gradually, over a long period of time.

Check around for the best rates. A home equity line of credit can free you from debt, and help you improve your credit rating at the same time.

Examining home equity loan rates

Home Equity loan rates

Home equity loan rates fluctuate daily just as all mortgage rates. They also rise in tandem with interest rates set by the Federal Reserve, which has raised rates 15 consecutive times since rates hit 40-year lows in 2004. Home equity rates are important, however, if you are serious about entering into a home equity loan you must examine any particular loan program in its entirety. Most home equity loans come with variable interest rates, some come with low introductory rates that can jump up after a set time period, and few come with fixed rates.

Home equity loans and their rates and fees differ greatly from program to program so it pays to speak with several lenders and expose yourself to a number of different programs.

Money costs money, but how much?
With all the different ways home equity loans are structured it can sometimes be tough to understand how much money you are spending on the actual loan. Some loans have upfront fees while others have a balloon payment at the end of the loan's life. Home equity loan rates can fluctuate greatly throughout the life of the loan as most home equity loans are not fixed. Many offer very low introductory rates that can jump up after that introductory period is over; be sure to understand the periodic cap and lifetime cap, they are the limits that specify the amount the interest rate can change during one period and the entire life of the loan respectively.

When looking at different home equity loan rates check the Annual Percentage Rate (APR) which indicates the cost of credit on a yearly basis. Remember that the advertised APR for home equity loans is based on interest alone, to get the full picture you must look at all fees associated with the loan such as points and closing costs. This is especially important when looking at a home equity credit line versus a traditional 2nd mortgage, where the APR includes the total credit costs for the loan.

Differing rates, programs and more
The range differing home equity loan rates and the programs in which they are structured can be quite exhausting. This is why when choosing a home equity loan it really pays to speak with multiple loan professionals and expose yourself to several programs. Compare home equity loan rates today with MortgageLoan.com's free quote service to put yourself on path to finding the right home equity loan for you.

Try a Home Equity Line of Credit

It's a good idea to have an emergency fund to fall back on in case you encounter unanticipated financial difficulties. Three to six months' worth of living expenses is the commonly accepted rule of thumb. Do you have these funds set aside in case an unforeseen disaster makes an unexpected appearance?

Flexible Power
An emergency fund doesn't necessarily need to be all in cash. A home equity line of credit is a savvy alternative. With a HELOC, you get direct access to your home equity in case you ever need it; but until you actually use it, there are no payments, interest, or debt. That flexibility is the strongest argument for this type of financial instrument.

When you do run into one of life's not-so-little surprises and start drawing from your credit line, you may appreciate the low interest rate that a HELOC carries. It's generally much lower than credit cards, and often better than traditional home equity loans. And, in most cases, you're only required to make interest payments during the first few years of your borrowing (the "draw period"). While it's still a smart long-term choice to pay down the actual balance, the pressure on your finances during times of need is more bearable when you have lower payments.

In the Interest of Interest
A HELOC will have an adjustable interest rate. As the federal lending rate rises, so does your interest rate. In a rising interest rate environment, this can become expensive. On top of that, your repayments will be larger the more you draw from the credit line; so this option may not be for you if you require absolutely predictable monthly payments.

Since your home equity line of credit is secured against your home, some or all of your interest payments may be tax deductible. It depends on the home's value and the existence of other equity debt. Ask a financial professional whether your interest payments will qualify.

If you have a lot of equity in your house, the credit limit on a HELOC can be very high, which makes it perfect for emergency use. You'll be able to handle most of what life throws at you.
Finally, you don't want to pay a lot of fees for an emergency fund. Look around for a HELOC with low or no closing costs, no fees for actually using the credit, and no early repayment fees. Getting a leg up on financial flexibility doesn't need to cost you an arm and a leg.

Home Equity: Understanding Bridge Loans

You've found the perfect house for you and your family, but the house you're living in hasn't sold yet. Where are you going to get the money to make sure that the new house doesn't get away? A bridge loan, although risky, may get you through these troubled waters.

Remember when you were young and on your family vacation, and your parents would drive over a very high, narrow bridge? You were petrified and thrilled at the same time. Bridge loans, although having nothing to do with water, can elicit the same feelings. These instruments give people the opportunity to buy the house of their dreams before they've sold their old one-but the risks can be dizzying.

Building the bridge

There are two types of bridge loans. The first pays off the mortgage on your current home and makes a down payment on the new one. This means that you pay the mortgage only on the new property, agreeing to repay the bridge loan when the old home sells. The second type of bridge loan is more risky, allowing you to borrow against the equity of the current home to use for your down payment. The scary part is that while you're paying off a bridge loan, you're still responsible for the mortgage payments on both homes.

Short Term Benefits

The bridge loan can provide that short-term influx of cash that you need to secure your new home. Although the loan typically requires interest-only payments, the rates and fees may be higher and carry significant pre-payment penalties. Before going down this path, talk to a real estate agent to find out how long houses such as yours are taking to sell. If the market is really slow, determine if you have the finances to pay two mortgages for that length of time. The risk-and it's substantial, especially in this buyer's market-is that your current home will be slow to sell, leaving you with essentially two mortgage payments for some time, straining even the best breadwinners.

The alternative: A HELOC

A home equity line of credit (HELOC) would give you enough money for the down payment on the new house and you're your closing costs, but is much less risky than the bridge loan. In order for this to work, you must apply for the HELOC before you put your house on the market. Many lenders won't let you borrow against the equity in your current home if it's for sale.Going over a bridge is always breathtaking.

It's the same with a bridge loan. It could be the very thing you need to secure the house of your dreams, but weigh the risks carefully. Other alternatives, like dipping into your home equity, may save you many frightening moments while getting you to your destination safely and happily.

Home Equity Loan Tips By: Amelia R. Frost

Rude Awakening Awaits Home Equity Loan Holders

Countrywide and other financial institutions are notifying thousands of homeowners that their credit is shrinking as home prices sag. Some are revoking the entire line of credit, with little or no advance warning.

If you have an active line of credit, be forewarned. You may have the rug yanked out from under you, and be in for a tumble. Tens of thousands of homeowners with home equity lines of credit (HELOCs) are starting to feel the impact of the mortgage meltdown. Like a grouchy bear unexpectedly awakened during winter hibernation, this development has reared its ugly head within the ailing real estate market.

Pulling the HELOC plugNow, lenders are sending notices to scores of customers, informing them that they need to stop borrowing money against their HELOCs. Home prices have dipped so far down, the collateral that houses represent to lenders no longer exists. As a result, lines of credit have evaporated into thin air. But Americans have recently gotten into the habit of relying on their real estate as a cushion against any financial setback. As the economy has slowed, withdrawals against home equity have quickened.

Home equity not a personal ATMMany economists and business journalists have been referring to houses as ATM machines; but now, the ATMs are getting unplugged. For many homeowners, the tightening of credit could not have come at a more challenging time. Tens of thousands are fighting off delinquency and foreclosure, thanks to vital cash flow from home equity loans and lines of credit.

Their experience now is like getting stranded in a foreign country on a vacation with a cancelled credit card, and no cash to tide them over until they return. In this case, the vacation started when real estate inflation creating an overabundance of overnight wealth-at least on paper. But now that the bubble has burst and the subprime mortgage sector has gone down in flames, paper millionaires have morphed into real life paupers. Just as unrealized gains in the stock market can be erased by a single day's drop, real estate wealth based on appraised market value can also get wiped out as a bubble bursts.

Homeowners are left out in the cold with their credit frozen by overcautious lenders trying to rein in the imaginary riches.Countrywide Financial sent about 120,000 letters to customers in January, letting them know that they can no longer borrow against their HELOCs. Similar actions have been taken by other lenders, including Texas-based USAA Federal Savings Bank.

The cutbacks affect a variety of home equity loans or second mortgages, and also mean that some institutions may curtail or even suspend issuance of new lines of credit. Chase Home Lending, a subsidiary of gigantic JP Morgan Chase & Co., for instance, will soon impose new restrictions regarding which customers qualify for a line of credit. In some of its jurisdictions, Chase has already dropped the loan to value limits on equity loans by 5 percent from previous levels.

Home Equity Loan Tips By: Tom Kerr

Stellar Time For Home Equity Renovation Loans

A depressed economy may not be good for the mortgage or housing markets, but it's a great time to renovate. Prices for building supplies are going down, contractors are hungry for work, and interest rates are ridiculously low, thanks to recent rate cuts.

If you've been thinking of using a home equity line of credit (HELOC) or home equity loan to remodel or renovate, there's no time like the present to act on those dreams. Housing prices are down, and mortgage money is tight. Sales are slow, and even the National Association of Realtors admits that we're probably a year or more away from a significant rebound. But if you've accumulated equity in your property, this is a jewel of a time to convert a portion of that equity into tangible upgrades.

Contracting bargains

The Joint Center for Housing Studies at Harvard University estimates that some 700,000 fewer homes will be built this year than were constructed in 2005. The Commerce Department also reports a 25 percent drop in single-family house construction compared to about a year ago. That basically means that you can hire contractors for a discount, because they're all dressed up for work with nowhere to go.

Offer them a job during this lull in the action, and you can get projects finished much less expensively now before the market bounces back. Once business gears up again, those same contractors will probably be too busy to even return phone calls, or take time out to provide bids. Architects are willing to take on smaller jobs that they would have passed on a couple of years ago, and other professionals in real estate-related fields are almost all eager for work opportunities.

You can find bargains on everything from electricians to interior decorators. Consider the cost of raw materials, also, in addition to the savings on skilled labor. Usually, construction materials go up in price, so you have to factor in an extra 20 percent to accommodate inflation as a project progresses. But, for example, the price of "oriented strand board," a substitute for conventional plywood, is about half of what is was just three years ago. That's a remarkable reversal, and the overall industry price trend may save you considerable cash.

Growing your home equity

Assets added now can translate into greater profits with higher margins once the economy regains traction, and using equity to grow equity is a time-tested strategy for increasing wealth.
Homes that are already prepared for market will get top dollar, as tardy homeowners scramble to do needed repairs and long-overdue facelifts. Or, perhaps you just want to improve your quality of life by enhancing your primary residence or vacation home.

Use a home equity loan to finance the work, and you may qualify for additional perks in the form of tax exemptions for interest payments. Whatever your motivation, scheme, or plan, the time is ripe for making capital improvements to real estate.

Home Equity Loan Tips By: Tom Kerr

Americans Irresponsible with Home Equity

Some homeowners are washing their hands of mortgage debt. They simply mail their house keys to the bank, and let the lender worry about how to create tangible assets from properties that have no actual equity.

If you lend money without securing the loan with collateral in the form of bankable equity, you run the risk of not collecting your debt. That's exactly what's happening in the lending industry. Mortgage companies, however, have nobody to blame but themselves.

Home equity abuse

In recent years, many homeowners were steered, or even pressured, into loans that they couldn't afford, lured by down payments involving little or no cash. Starting with no equity accelerates the path to foreclosure when prices drop; and prices have dropped so steeply, that the lows are setting new records almost every time the data is updated. Now, some homeowners are walking away from mortgages because they have no equity to lose, and lenders have little or no leverage to discourage the practice.Economists, for example, are citing evidence of mortgage holder mutiny as a factor in the widening loan sector crisis.

As was sometimes the case during the real estate downturn in the late 1980s, some homeowners have adopted a strategy of creative debt management that involves walking away from red ink without a second thought. Rather than pay off their mortgages, they incur a severe bruise on their credit, and leave mortgage lenders holding the bag. The problem for lenders is that the bag is empty, because it never held any substantial equity in the first place.

No way out

Known as "willful default," the practice of renouncing payback responsibility in favor of a walkout often happens when consumers feel that they have no other way to salvage their credit, and have nothing left to lose. Home values are plummeting, erasing the equity of millions of homeowners who suddenly owe more on their mortgages than their homes are worth. This condition of negative equity leads to feelings of resentment and frustration. Consumers may feel that it's unfair for them to owe money on a loan that's worth more than their property. Not willing to give lenders an unearned profit, they simply walk away, letting the lender pick up the pieces and take the loss.

The price of home equity irresponsibility

There's always a price to pay for having a foreclosure on your record. With a paltry credit score, homeowners who've walked away from obligations will likely have trouble starting anew. Then again, every market operates on the law of supply and demand. If millions of consumers enter foreclosure, lenders will have nobody left with good credit to recruit as a customer base.

Eventually, lenders will be forced to ease their standards, as the threat of having a foreclosure in one's background loses its teeth and clout. With tens of billions of dollars in losses, lenders are already feeling somewhat powerless.

Home Equity Loan Tips By: Tom Kerr

The Right Home Equity Strategy for Excess Cash

Some experts tout the wisdom of paying off your mortgage early. Others say it's better to stash excess cash in an emergency fund. How do you know which strategy is right for you?

Managing your personal finances can be like an extreme juggling act. There you are, trying to keep your current expenses paid, while simultaneously setting aside money for the future, absorbing unexpected challenges like car accidents and plumbing leaks, and spending occasionally on yourself. All this without dropping any of the balls in the air! As you deftly keep them airborne, expert advice is being tossed at you through email, your morning paper, the evening news, and Internet headlines. No wonder you're confused about how to manage your excess cash.

If you have money left over every month after you pay your bills, feed yourself, and put gas in the car, the first thing you should do is count your blessings. Next, decide which excess cash strategy works best for you: paying off your mortgage early, or building up your emergency savings fund. Each has its pros and cons.

Paying down your mortgage

If you make extra principal payments on your mortgage, you'll pay off your debt early, build your home equity more quickly, and save thousands in interest costs. But you'll also be tying up your money in your home, which is not a liquid asset. In the current lending environment, lenders aren't offering 100 percent home equity loans anymore. That means that if an emergency arises, you can only convert some of it into cash. And if you lose your job, you may not be able to convert any home equity into cash, because you won't qualify for the loan.

Saving for a rainy day

If you put that extra cash into a high-rate savings account instead of making extra principal payments, you'll have the money available if you need it. You'll also save enough to pay off the mortgage early, if that's your goal. But if spending is your weakness, that big savings account balance might never materialize.

Split the difference

There's one more option that's ideal for homeowners who don't like putting all their eggs in one basket. Let's say you have $400 to spare each month. Put $200 in a high-rate savings account, and pay an extra $200 on your mortgage. As an added measure, you might also consider opening a home equity line of credit now, so that it's in place in case financial disaster hits. Then you'll have access to liquid cash, as well as home equity funds. And, by making the extra principal payments on your mortgage, you'll be saving on your interest costs, too.

Regular investments in your mortgage, your deposit balance, or both, will vastly improve your financial situation in the long run. Of course, your circus act will continue, but eventually, it will be easier to manage.

Home Equity Loan Tips By: Catherine Brock

Home Equity: If You Use It, You Lose It

Home equity is a powerful financial tool, as well as a resource that's difficult to replace.

In this election year, you might hear environmentally-friendly politicians arguing over the use of non-renewable resources. Of course they're talking about coal and natural gas, but maybe home equity should become a part of that discussion.

Home equity basics

Home equity is the difference between your home's market value and the amount of outstanding mortgage debt that you owe. If your home appraises at $450,000, for example, and you owe $200,000 in mortgage debt, the value of your home equity is $250,000.

This $250,000 is an asset that can be used to secure additional borrowing. If you need to borrow money for a home remodel, your kid's college tuition, or a new car, you can do so on the strength of your home equity. You can't borrow the entire $250,000, but you can generally borrow 70 to 75 percent of your home's value. In our example, that equates to $315,000 to 337,500.

Accounting for the $200,000 of first mortgage debt, we arrive at home equity borrowing power of $115,000 to 137,500.

If you're wondering why you can't borrow against your entire equity, just consider the prospect of property value declines. Lenders don't want to be stuck holding collateral that's worth less than the amount of debt taken out against it. Therefore, the lender must leave that cushion of 25 to 30 percent between the home's value and the allowable debt amount.

Downside of home equity

Returning to our example, an influx of more than $100,000 of cash to a household can be cause for celebration. But it doesn't come without a downside. Once you fund that home equity loan, you reduce your borrowing power to zero. And you can't replenish that borrowing power until your home's value goes up, or your debt goes down. In today's economy, both of these can take a considerable amount of time.

If you aren't confused enough, there's one more factor to consider. Sometimes, it's hardest to obtain a home equity loan when you need it most. If you suffer a loss of income, for example, mortgage lenders aren't going to provide the credit that you need to get through those rough times. For this reason, some homeowners open a home equity line of credit (HELOC) while they're still gainfully employed. HELOCs are appropriate for this purpose because they allow you to borrow in increments as needed.

In summary, home equity is a lot easier to use up than it is to replace. This means that you should have a very good reason for flexing that home equity borrowing power. Just so you know, conventional wisdom says that an exotic vacation and flashy jewelry don't qualify as good reasons. The best strategy is to treat that home equity as a precious, non-renewable resource; that way, it'll be there for you when you need it most.

Home Equity Loan Tips By: Catherine Brock

Home Equity Loan Holders

Rude Awakening Awaits Home Equity Loan Holders

Countrywide and other financial institutions are notifying thousands of homeowners that their credit is shrinking as home prices sag. Some are revoking the entire line of credit, with little or no advance warning.

If you have an active line of credit, be forewarned. You may have the rug yanked out from under you, and be in for a tumble. Tens of thousands of homeowners with home equity lines of credit (HELOCs) are starting to feel the impact of the mortgage meltdown. Like a grouchy bear unexpectedly awakened during winter hibernation, this development has reared its ugly head within the ailing real estate market.

Pulling the HELOC plug

Now, lenders are sending notices to scores of customers, informing them that they need to stop borrowing money against their HELOCs. Home prices have dipped so far down, the collateral that houses represent to lenders no longer exists. As a result, lines of credit have evaporated into thin air. But Americans have recently gotten into the habit of relying on their real estate as a cushion against any financial setback. As the economy has slowed, withdrawals against home equity have quickened.

Home equity not a personal ATM

Many economists and business journalists have been referring to houses as ATM machines; but now, the ATMs are getting unplugged. For many homeowners, the tightening of credit could not have come at a more challenging time. Tens of thousands are fighting off delinquency and foreclosure, thanks to vital cash flow from home equity loans and lines of credit. Their experience now is like getting stranded in a foreign country on a vacation with a cancelled credit card, and no cash to tide them over until they return.

In this case, the vacation started when real estate inflation creating an overabundance of overnight wealth-at least on paper. But now that the bubble has burst and the subprime mortgage sector has gone down in flames, paper millionaires have morphed into real life paupers. Just as unrealized gains in the stock market can be erased by a single day's drop, real estate wealth based on appraised market value can also get wiped out as a bubble bursts. Homeowners are left out in the cold with their credit frozen by overcautious lenders trying to rein in the imaginary riches.

Countrywide Financial sent about 120,000 letters to customers in January, letting them know that they can no longer borrow against their HELOCs. Similar actions have been taken by other lenders, including Texas-based USAA Federal Savings Bank. The cutbacks affect a variety of home equity loans or second mortgages, and also mean that some institutions may curtail or even suspend issuance of new lines of credit. Chase Home Lending, a subsidiary of gigantic JP Morgan Chase & Co., for instance, will soon impose new restrictions regarding which customers qualify for a line of credit. In some of its jurisdictions, Chase has already dropped the loan to value limits on equity loans by 5 percent from previous levels.

Home Equity Loan tips

Home Equity Loans

Understanding Bridge Loans

You've found the perfect house for you and your family, but the house you're living in hasn't sold yet. Where are you going to get the money to make sure that the new house doesn't get away? A bridge loan, although risky, may get you through these troubled waters.

Remember when you were young and on your family vacation, and your parents would drive over a very high, narrow bridge? You were petrified and thrilled at the same time. Bridge loans, although having nothing to do with water, can elicit the same feelings. These instruments give people the opportunity to buy the house of their dreams before they've sold their old one-but the risks can be dizzying.

Building the bridge

There are two types of bridge loans. The first pays off the mortgage on your current home and makes a down payment on the new one. This means that you pay the mortgage only on the new property, agreeing to repay the bridge loan when the old home sells.

The second type of bridge loan is more risky, allowing you to borrow against the equity of the current home to use for your down payment. The scary part is that while you're paying off a bridge loan, you're still responsible for the mortgage payments on both homes.

Short Term Benefits

The bridge loan can provide that short-term influx of cash that you need to secure your new home. Although the loan typically requires interest-only payments, the rates and fees may be higher and carry significant pre-payment penalties. Before going down this path, talk to a real estate agent to find out how long houses such as yours are taking to sell. If the market is really slow, determine if you have the finances to pay two mortgages for that length of time. The risk-and it's substantial, especially in this buyer's market-is that your current home will be slow to sell, leaving you with essentially two mortgage payments for some time, straining even the best breadwinners.

The alternative: A HELOC

A home equity line of credit (HELOC) would give you enough money for the down payment on the new house and you're your closing costs, but is much less risky than the bridge loan. In order for this to work, you must apply for the HELOC before you put your house on the market. Many lenders won't let you borrow against the equity in your current home if it's for sale.

Going over a bridge is always breathtaking. It's the same with a bridge loan. It could be the very thing you need to secure the house of your dreams, but weigh the risks carefully. Other alternatives, like dipping into your home equity, may save you many frightening moments while getting you to your destination safely and happily.

Home Equity Loan tips

Home Equity for Financial

Retirees: Tap Home Equity for Financial Security

Many retirees fret about financial security, but those with accumulated equity can find peace of mind by tapping into it in one of two ways. Reverse mortgages and home equity loans both work well to provide retirement income.

As the baby boomer generation hits retirement age, many 60-something homeowners worry about how to provide a reliable and constant source of income for themselves. While most feel secure about their housing situation, and many have paid off their mortgages in full, they're less confident about where they'll get funds to cover day-to-day budgets or major expenses, like medical care.

Nearly two thirds of all retirement age Americans believe that they'll remain in their present home, rather than moving and selling. What homeowners nearing their sunset years may not understand, however, is how to leverage the asset of their primary residence into a source of steady fixed income. Noted personal finance experts recommend that they explore the possibility of turning their homes into cash cows by using either a home equity loan, or a reverse mortgage.

Leveraging with a home equity loan

A home equity loan works like other consumer loans, except that the collateral that secures it is your property. That bodes well for older Americans who don't owe any money on their homes, because even modest and average single-family homes are generally worth a quarter of a million dollars or more.

Average homes in more popular, high demand regions of the country-like California, for example-can be worth many times that much, as can homes that owners have improved over the years through add-ons and upgrades. A retiree can go to a bank or mortgage company and apply for a loan based on the current market value of his property.

At closing they'll walk away with a significant amount of cash. It's even possible to roll the closing costs into the principal of the loan to pay it back gradually over time. While home equity loans need to be repaid, a homeowner can use a portion of the loan to make those payments. If the equity is reinvested in stocks or bonds that offer a healthy yield, that extra income can help defray the cost of servicing the payback.

Benefits of a reverse mortgage

The other option may be even more attractive and cost effective. The reverse mortgage is, in essence, a cash advance based on the value of the home. By taking out a reverse mortgage, a homeowner receives monthly payments from the mortgage company, without having to pay the lender a penny.

Funds can be taken in a lump sum, through regular monthly payments, as a line of credit, or through a combination of these options. Best of all, the homeowner can't be forced to sell his home or move. Even if the home loses market value, the retiree is safe, because the mortgage lender has to suffer the loss and continue to make payments.

Home Equity Loan tips