The Facts About Home Equity Loans

Most people spend more time in their home than in any other place. This is where many of them unwind from a busy day at work, spend quality time with their family, and entertain guests, family and friends. In today’s tough economic times, people are searching different ways that they can pay down some extra bills, or put some additional cash in their pockets. Many have turned to home equity loans to fill this gap. This article talks about some of the things that you can expect when taking out a home-equity loan.

Yes, it is true. Your home may actually be able to save you from financial distress, or get you out of a devastating event that has happened in your life. This is normally done through a home equity line of credit. The definition of home equity is the overall value of your home above and beyond any money that is owed to pay off your mortgage. This number will increase over time as the value of your home begins to go up. Most people decide to use this value in their home towards an equity line of credit. Some of the reasons that people use home equity loans are listed below.

  1. One of the main reasons that people use home equity loans for is to either repair or remodel their existing home. This is also a great way to build value in your home.
  2. Some parents use home equity loans to send their kids to college. With the rising cost of education, many parents are using home equity loans to fill in any gaps that may exist between the money that they have available with the difference in what they need for their kids to be able to attend school.
  3. Pay off past-due medical bills. The equity in your home is a great way to help you settle an emergency medical bill; pay for a pregnancy, or to help you get through a serious illness.

However, before you jump the gun, and run off to apply for a home equity loan, make sure that you have a good reason for using the equity in your home, because you a definitely want to make sure that you are doing it at the right time, taking into account such things as the interest rate, the amount of time that you want to refinance for, and most importantly, the amount of monthly payment that you can afford.

You must not lose sight of the fact that you are putting your house, sweat, and tears at the stake for money, which could possibly be gone before you know it. Therefore, this is definitely a matter that you want to take plenty of time to research. The 3 tips that are listed below can be used to make the home equity loan process go as smoothly as possible.

  1. Choose your lender carefully and make sure that you are dealing with a reputable company.
  2. Take the time to gather all of your necessary paperwork before hand. You will need such things as tax returns, bank statements, recent pay stubs, and probably a copy of your recent tax bill.
  3. Get as much information up front as you can such as the terms and conditions for the loan.

If you take the time to follow the information and tips in this article, you will ensure that your home equity loan process will go as smooth as possible, and that you will not make a choice that you end up regretting for the rest of your life.

Loan Modification

There are early reports surfacing that over half of loan modifications that were granted earlier this year are in default again, according to bank regulators. So the question that I was trained to ask when speaking with a loan modification prospect: “Can you afford your home – just not the loan that is on it?” should really be restated. That question leaves way too much to speculation as to a homes affordability. A $600,000 loan at 2% interest only (or “I.O.” using industry lingo), would yield a monthly payment of $1,000 – not including property taxes, mello roos, insurance, HOA dues, etc that would also constitute a total mortgage payment. Assuming the home’s value is equal to the loan amount, taxes in California would come to $625/month and insurance about $60/month (not including earthquake insurance, that is.) At this point, you’re looking at a minimum P.I.T.I. (principle, interest, taxes & insurance) payment of $1,685/month. That, however is NOT a basis to determine affordability.

A $600,000 fully amortized loan, at todays rate of roughly 5.5% would create a monthly payment of about $3,407. Your P.I.T.I. would then be $4,092. A few years ago, most people would argue that 5.5% is a terrific rate! Why, then is there is a huge disparity – in this case over $2,400/month – between the standard of affordability borrowers were brainwashed into believing and actual affordability? Lenders’ tried and true underwriting guidelines of no more than 34% – 38% of your gross monthly income going towards your mortgage expense was shattered with the abuse of the “Stated Income”, “EZ Doc”, “Limited Doc” or whatever else the option ARM loan was called. The lines of affordability were not only blurred, they were obliterated!

After about a year of trying to help out their borrowers, lenders are being forced to reconsider their strategy. Let’s face the truth. Yes, the lenders made an obsene amount of money during the Option ARM craze. Yes, the brokers misrepresented the wonderful attributes of the Option ARM loan and conveniently forgot to explain the downside. And, Yes, actual numbers were stretched in the loan application process to ensure approval. These are all truths that burn like “The Scarlet Letter” on the collective chest of the lenders. But the home buyer must also accept responsibility for their part of the process – namely looking away when all this was happening around them. I’ve spoken to many loan modification clients who were so ready to scream “FRAUD!” – to which I had to reply, “but wasn’t that YOUR signature on the loan application (and specifically your initials at the bottom of the income and assets page which proves you reviewed this particular page) that stated you made $6,500 a month as a waiter in a Beverly Hills restaurant?” Boy! those must’ve been some great tips that neither had to be proven to the underwriter nor reported to the IRS.

Now what we are noticing, is that many lenders are requiring a “payment plan” period of usually 4-6 months, to determine that the homeowner is serious about keeping their home – and not just trying to work the system. The plan usually consists of bringing in 20% – 30% of the amount in arrears (if you are more than 7 or 8 months down) or at least one payment if you just entered N.O.D. (Notice of Default) status to show good faith; and a monthly payment to be negotiated – which hopefully would make sense and be lower than the payment that put you into default to begin with. If the plan is adhered to, then and only then will the lender consider paying their legal and administrative fees to permanently modifying the loan. Also good to know, is that many times, what a lender will do for one borrower they will not do for the next. “Prior performance does not guarantee future results” is the phrase I find myself saying to every loan modification client I deal with. One of the reasons for this is that most lenders deal with several investors – and it’s usually the investor that determines the fate of the borrower. So if you are in the market to modify your loan, don’t be surprised if the lender, or their investor, want to see cash up-front to even consider helping you out.