Home Equity Loans
Once considered one of the many perks of homeownership, home equity loans have gone the way of the dinosaur. The housing market crisis of recent years has turned the market upside down and left millions of homeowners with zero equity. Worse yet, many of these homeowners now owe more than their homes are worth, which is called being underwater.
If you are one of the lucky homeowners with home equity, it's time to cheer. You are in an enviable position. For those with large amounts of consumer debt, including credit card debt, medical bills and consumer loans, home equity can be used to pay down the balances. Many debt consolidation companies view home equity loans, also called second mortgages, as the best source for funds to pay down debt.
Home Equity and Debt Consolidation
For a home equity loan, borrowers take out the equity in their home. For example, if your home is worth $150,000 and you owe $100,000, then you have $50,000 in equity. A homeowner may be able to use the home equity for expenses. Many financial experts suggest that it be used to pay off high-interest credit cards, medical bills and other unsecured loans.
However, this needs to be done with caution and with the help of a finance professional. That’s because if you default on a home equity loan, you could lose your home. Many homeowners run the risk of further extending themselves financially if the situation is not handled with care.
With the help of a debt consolidation company, many homeowners can find relief from looming debt. Because of their leverage and knowledge in the world of finance, some debt consolidation companies are able to negotiate with creditors for lower interest rates and possibly for lower overall amounts owed. Often debt consolidation companies will look to home equity loans as a means to pay off the debt on a month-to-month basis.
For anyone considering a home equity loan, there are several key terms to learn:
- Loan-to-Value Ratio – Commonly referred to as LTV, this is a term used by mortgage lenders to express the relationship between the amount of the loan and the current property value.
- Valuation – Also called land valuation, this is the process of putting a value, or a dollar amount, on property.
- Appraisal – Completed by an appraiser, an appraisal is an expert valuation of property or land. An appraiser determines how much the property is worth by looking at all factors, including the size, location and condition of the home and property. An appraiser also takes other factors into consideration, including the current market trends and area home sales.
- Points – When taking out a home equity loan, it is best to avoid paying points. There are two kinds – discount and origination. Discount points are a form of prepaid interest. While each point paid typically reduces the interest rate by about a quarter of a percentage point, it can be a costly up-front charge. One point equals 1 percent of the original loan. Origination points, also called origination fees, are charged by the lender to cover the cost of making the loan.
Tips to Getting a Home Equity Loan
Most home equity loans require good credit and a reasonable loan-to-value ratio. It is important to utilize a finance professional when seeking such a loan.
If the goal of the home equity loan is debt consolidation, a debt specialist can help you navigate this difficult and confusing path. Finance professionals know the pitfalls that come with poorly executed debt consolidation programs, and can help you avoid them. Please call 888-997-3468 for a consultation and to start on the path to debt-free living.
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