The Home-Equity Loan: What It Is And How It Works

A home-equity loan, also known as a second mortgage, lets homeowners borrow money by leveraging the equity in their homes. Home-equity loans exploded in popularity in 1996 as they provided a way for consumers to somewhat circumvent that year’s tax changes, which eliminated deductions for the interest on most consumer purchases. With a home-equity loan, homeowners can borrow up to $100,000 and still deduct all of the interest when they file their tax returns. Here we go over how these loans work and how they may pose both benefits and pitfalls.

Two Types of Home-Equity Loans Home equity loans come in two varieties - fixed-rate loans and lines of credit – and both types are available with terms that generally range from five to 15 years. Another similarity is that both types of loans must be repaid in full if the home on which they are borrowed  is sold.

Fixed-Rate Loans
Fixed-rate loan provide a single, lump-sum payment to the borrower, which is repaid over a set period of time at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan.

Home-Equity Line of Credit
A home-equity line of credit (HELOC) is a variable-rate loan that works much like a credit card and, in fact, sometimes comes with one. Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or special checks. Monthly payments vary based on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the HELOC has a set term. When the end of the term is reached, the outstanding loan amount must be repaid in full.

Benefits for Consumers Home-equity loans provide an easy source of cash. The interest rate on a home-equity loan – although higher than that of a first mortgage – is much lower than on credit cards and other consumer loans. As such, the number-one reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances (according to bankrate.com). Interest paid on a home-equity loan is also tax deductible, as we noted earlier. So, by consolidating debt with the home-equity loan, consumers get a single payment, a lower interest rate and tax benefits.

Benefits for Lenders Home-equity loans are a dream come true for a lender, who, after earning interest and fees on the borrower’s initial mortgage, earns even more interest and fees. If the borrower defaults, the lender gets to keep all the money earned on the initial mortgage and all the money earned on the home-equity loan; plus the lender gets to repossess the property, sell it again and restart the cycle with the next borrower. From a business-model perspective, it’s tough to think of a more attractive arrangement.

The Right Way to Use a Home-Equity Loan Home-equity loans can be valuable tools for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to repay the loan, its low interest rate and tax deductibility of paid interest makes it a sensible alternative. Fixed-rate home-equity loans can help cover the cost of a single, large purchase, such a new roof on your home or an unexpected medical bill. And the HELOC provides a convenient way to cover short-term, recurring costs, such as the quarterly tuition for a four-year degree at a  college.
Recognizing Pitfalls The main pitfall associated with home-equity loans is that they sometimes seem to be an easy solution for a borrower who may have fallen into a perpetual cycle of spending, borrowing, spending and sinking deeper into debt. Unfortunately, this scenario is so common the lenders have a term for it: reloading, which is basically the habit of taking a loan in order to pay off existing debt and free up additional credit, which the borrower then uses to make additional purchases.

Reloading leads to a spiraling cycle of debt that often convinces borrowers to turn to home-equity loans offering an amount worth 125% of the equity in the borrower’s house. This type of loan often comes with higher fees because, as the borrower has taken out more money than the house is worth, the loan is not secured by collateral. Furthermore, the interest paid on the portion of the loan that is above the value of the home is not tax deductible.

If you are contemplating a loan that is worth more than your home, it might be time for a reality check. Were you unable to live within your means when you owed only 100% of the value of your home? If so, it will likely be unrealistic to expect that you’ll be better off when you increase your debt by 25%, plus interest and fees. This could become a slippery slope to bankruptcy.

Another pitfall may arise when homeowners take out a home-equity loan to finance home improvements. While remodeling the kitchen or bathroom generally adds value to a house, improvements such as a swimming pool may be worth more in the eyes of the homeowner than the market determining the resale value. If you’re going into debt to make cosmetic changes to your house, try to determine whether the changes add enough value to cover their costs.

Paying for a child’s college education is another popular reason for taking out home-equity loans. If, however, the borrowers are nearing retirement, they do need to determine how the loan may affect their ability to accomplish their goals. It may be wise for near-retirement borrowers to seek out other options with their children.

Should You Tap the Equity in Your Home? Food, clothing and shelter are life’s basic necessities, but only shelter can be leveraged for cash. Despite the risk involved, it is easy to be tempted into using home equity to splurge on expensive luxuries. To avoid the pitfalls of reloading, conduct a careful review of your financial situation before you borrow against your home. Make sure that you understand the terms of the loan and have the means to make the payments without compromising other bills and comfortably repay the debt on or before its due date.

Popularity: 20% [?]

HOME EQUITY LOAN

A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower’s house, and reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one’s personal income taxes.

There is a specific difference between a home equity loan and a Home Equity Line of Credit (HELOC). A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate.

When considering a loan, the borrower should be familiar with the terms recourse and nonrecourse loan, secured and unsecured debt, and dischargeable and non-dischargeable debt.

US traditional mortgages are usually non recourse loans. “Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable.”^[1] A US home equity loan may be a recourse loan for which the borrower is personally liable. This distinction becomes important in foreclosure since the borrower may remain personally liable for a recourse debt on a foreclosed property.

Home equity loans are secured loans. “The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower.” ^[2] Credit card debt is an unsecured debt such that no asset has been pledged as collateral for the loan. Using a home equity loan to pay off credit card debt essentially converts an unsecured debt to a secured debt.

When deciding upon a type of loan, the borrower should also consider if the debt is dischargeable in bankruptcy. For instance, US student loans are “practically non-dischargeable in bankruptcy”.^[3]

This is a revolving credit loan, also referred to as a home equity line of credit, where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due.

Typically, the interest rate is based on the Prime rate plus a margin.

Home equity loan fees

Here is a brief list of possible fees that may apply to your home equity loan: Appraisal fees, originator fees, title fees, stamp duties, arrangement fees, closing fees, early pay-off and other costs are often included in loans. Surveyor and conveyor or valuation fees may also apply to loans, some may be waived. The survey or conveyor and valuation costs can often be reduced, provided you find your own licensed surveyor to inspect the property considered for purchase. The title charges in secondary mortgages or equity loans are often fees for renewing the title information. Most loans will have fees of some sort, so make sure you read and ask several questions about the fees that are charged.

Popularity: 21% [?]

EQUITY LOAN

An equity loan is a mortgage placed on real estate in exchange for cash to the borrower. For example, if a person owns a home worth $100,000, but does not currently have a lien on it, they may take an equity loan at 80% loan to value (LTV) or $80,000 in cash in exchange for a lien on title placed by the lender of the equity loan.

Many lending institutions require the borrower to repay only an interest component of the loan each month (calculated daily, and compounded to the loan once each month). The borrower can apply any surplus funds to the outstanding loan principal at any time, reducing the amount of interest calculated from that day onwards. Some loan products also allow the possibility to redraw cash up to the original LTV, potentially perpetuating the life of the loan beyond the original loan term.

The rate of interest applied to equity loans is much lower than that applied to unsecured loans, such as credit card debt. The reasoning behind this is that equity loans involve collateral, and credit card debt does not.

Popularity: 18% [?]

Study in USA

Resource for the latest information of Study in USA. It contains useful information of Study in USA along with guide to Study Abroad, Universities, Scholarships, Application Documentation, Student Visa process and Student Life.

Should you study in the US? Why have so many international students chosen to study in the US over another country? Does the US still welcome international student? What are your US study options?

The US hosts more international students than any other country in the world, a number fast approaching 600,000. In fact, international students comprise approximately 4% of the total undergraduate US university and US college population, and 10% for US graduate school. These international students from every continent in the world choose to study in the US because they believe that a US education would afford them the best preparation for their future. They leave homes, families and friends in order to pursue their dreams of an education in the US. In fact, International students who study in the US contribute more than $13 billion to the US economy!

US universities, US colleges and US schools constantly rank very high in world rankings, just one of the reasons to study in the US. Schools such as Harvard University, Stanford University, MIT, Julliard, Berkley School of Music, West Point, are all world famous and welcome international students. The US offers international students the most exciting, rewarding and comprehensive array of study options in the world. International students who choose to study in the US have almost unlimited study choices. Furthermore, international students who successfully complete their US study are highly sought-after by employers worldwide.

Benefits of Study in USA

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Popularity: 19% [?]

Study Abroad for Higher Education

“It is not so much what is poured into the student but what is planted that really counts.”
Resource for the latest information of Study Abroad for Higher Education. It contains useful information of Study Abroad for Higher Education along with guide to Study Abroad, Universities, Scholarships, Application Documentation, Student Visa process and Student Life.

Studying abroad may be that defining moment in your education that will change your life. Nothing will be quite the same after you have studied abroad. Your perspectives will be global, your attitudes will be international and you will have memories that you will carry forever. Your resume will be more attractive, in some cases your language proficiency will be advanced, and you will have developed lifelong friendships. … Continue Reading

Popularity: 20% [?]

Scholarship and Loan Information:

Study Abroad Financial Aid

Is Financial Aid Available for Study Abroad?

If you are currently receiving financial aid for your college education, in many cases you can use it to study abroad. This can be the case with aid from an institution, a foundation, the state or federal government, or other private or public sources. Talk to your study abroad advisor, financial aid officer, or bursar about what can and can’t be applied to a program of study abroad.

The Higher Education Act (HEA) of 1992 mandated that a student can receive financial aid for study abroad if the student is enrolled in a program approved by the home institution. Moreover, the student would be eligible to receive “grants, loans, or work assistance without regard to whether the study abroad program is required as a part of the student’s degree.”

What Types of Financial Aid are Available?

Federal and state governments, foundations, and private and public organizations are primary sources of financial aid. Be sure to check with your financial aid director, study abroad advisor or bursar about whether your financial aid can apply to study abroad.

If you are planning to attend an overseas study program sponsored by another institution, the home institution, through a written agreement between the schools, might allow you to use your financial aid. But students should realize that policies vary among institutions of higher education and therefore, should check with their study abroad advisors and financial aid administrators regarding enrollments with another institution.

Note the following types of financial aid: … Continue Reading

Popularity: 16% [?]

University fee review date set

The review should determine what happens to university fees

The details of a review into fees paid by England’s university students are to be announced on Monday.

The government will outline the scope of the inquiry and name the person who will lead it in a written statement to the House of Commons.

The review is expected to be wide-ranging, looking at various funding options, but will not be finished until after the next general election.

Students have been staging campaigns against any increase in fees.

A new series of protests by the National Union of Students have been run across England since the start of the university term.

Students in England and Northern Ireland, and non-Welsh students in Wales have to pay tuition fees of up to £3,225 a year.

Welsh students studying in Wales pay fees of £1,285 while there are no tuition fees in Scotland.

STUDENT FEES (2009-10) England: £3,225 p.a. N. Ireland: £3,225 p.a. Scotland: free to Scots, £1,775 to other UK Wales: £1,285 to the Welsh, £3,225 to other UK Students from elsewhere in the EU pay the same as those locally Those from outside the EU pay whatever the university charges

But some university vice-chancellors are reported to want to raise tuition fees to as much as £7,000 a year.

When variable tuition fees were introduced in England in 2006, allowing universities to set their own fees up to this level, the government promised there would be a full review before any lifting of that limit.

With recession cuts looming, all sides are keen to get their message across in the debate over who should pay what in higher education.

Earlier this week, Business Secretary Lord Mandelson warned that the higher and further education sectors faced “increasingly tight fiscal constraints” and needed to raise more of their own funds.

“We will also have to look at the contribution that individuals make to the cost of higher education, which we will do through the independent fees review,” he said.

The Confederation of British Industry angered students by saying they should accept higher tuition fees as “inevitable” and pay more interest on their student loans.

NUS president Wes Streeting said: “Little over a month ago, the CBI called for a rise in fees, and polls have found that most university vice-chancellors would like to charge students £5,000 or more a year.

“Students are already graduating with over £20,000 of debt, and in the current economic climate it is extremely arrogant to argue that they should pay even more. We believe the review must look at alternatives to the disastrous system of top up fees.”

The NUS says students should be properly represented in the review.

Popularity: 42% [?]