Home Equity Loans: What you must know and did not
The difference in home equity loans
Home Equity loans can be easy to come by and in most cases are easy to qualify for depending on the lender. However these loans are not guaranteed in the same manner as traditional first mortgages.
If a homeowner does not understand some of the unspoken rules of a Home Equity Line they can be caught by surprise. Therefore consider the following items before jumping into opening a line.
Home Equity loans are Adjustable
Home equity loans work off of adjustable rates, meaning that they float with prime. Prime rate is what the banks used to lend among one another and is set by the federal banking commission. When the Feds want to stimulate the economy they tend to lower the prime rate, which frees up money for banks to lend. When the economy gets away from them in the form of inflation, they raise prime, making money more costly to lend. What borrowers need to understand is that prime can swing as much as seven or eight points over three to four years, if not more drastic. This can mean that home equity loans that are attained by the borrower when rates are low, my only require a payment of $200 for example, but over the course of a few years, may jump to $500, causing a financial hardship on the borrower.
I can lock a line?
What banks often do not tell a borrower is that home equity loans can be locked in at a fixed rate. This rate is usually two percentage points higher than the current prime offer, but it does safe guard against inflation and rising rates. As with the example above, this could mean locking a rate in that would only incur a payment of $300. It is more than the $200, but much less than the $500.
The bank reduced my equity line!
There is nothing worse than thinking that you, as a homeowner have the security of home equity loan to use for emergencies, only to have the bank reduce you line based on the current housing market. Home equity loans are not guaranteed in the same manner as traditional mortgages, therefore a bank has the right to reduce or freeze the line in accordance to market conditions.
I can not believe the note is due!
Most mortgages operate under a 30 year repayment term. Most home equity loans operate under a 30 year repayment term, but are due in 10 to 15 years. Home equity loans can creep up on homeowners quickly and become due putting them into a new financial situation.