Saturday, December 15, 2007

An Introduction to Home Equity Loans

What is a bigger stress inducer than a mother-in-law? Serious financial debt undoubtedly nudges the in-laws out for a victory for the most worrisome factor in life. But a home equity loan could be what could ease some of a homeowner's concerns and qualms.

A home equity loan is a kind of loan in which the borrower, a homeowner, uses his home as a type of guarantee that he will pay the loan back. A family struggling with big medical bills or the kids' college tuition could benefit from the lump sum of money that a home equity loan would bring. The difference between a home equity loan and a mortgage is that they are most of the time for a shorter pay period than a mortgage. And sometimes home equity loans are tax deductible, which is an added bonus for a family. There are two types of home equity loans.

The first is a closed-end home equity loan that usually has fixed rates and is capable of being refinanced. Conversely, the open-end home equity loan is when the homeowner can decide how much and how often to take credit against his home. A homeowner can borrow as much as the full amount against her/his home's market value with a home equity loan, which gives lots of extra money for tight financial binds with which life can surprise us all. Plus, any really huge debts can be paid off, lifting stress and giving a homeowner the chance for financial mobility.

As with any obtaining any loan it is important that a homeowner get a copy of her/his credit report and make sure there are no mistakes on it. Getting a loan has its own trials without the added stress of correcting the credit report during the home equity loan process, so corrections should be made prior to the actual application for the loan. Also, a homeowner might want to organize her/his other financial information concerning tax returns, a year's income, and home insurance

Also, be cautious of various home equity scams out there. One is where a lender informs a homeowner after the whole business of the loan has been hashed out that the monthly payments will be higher than agreed. Since only what a homeowner signed can legally be enforced, it is important to keep track of every document signed and to be thorough in reading all papers. Do not feel rushed to do anything—take as much time as needed. This way you can have a legal basis to argue from if the issue is taken to court.

Furthermore, "balloon" payments are so-called because a home equity loan lender may allow a homeowner to refinance the loan for lower monthly payments, only to leave the home owner responsible for paying an extreme amount of money by the end of the loan's pay period. The homeowner is then facing foreclosure because they did not take time to investigate the terms of the refinancing deal. It pays and saves to be a active participant in the loan process, asking questions along the way and consulting an attorney to ensure that all terms are completely understood.

Grant Eckert

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