Understanding Home Equity Loan Options and Application Process

Posted by Rana & filed under Home & Mortgage Refinance Information.

Americans are making more and more purchases with credit cards.  The convenience and simplicity of credit cards make their use faster and easier than writing checks or keeping up with cash.  However, sometimes credit card debt can become a problem for some consumers.  When credit card debt becomes a problem, a home equity loan may be one solution worthy of consideration.  But, before agreeing to a home equity loan, it is a good idea to know how to find one, how the rates work, and what the requirements need to be met during the application process.

Home equity loans are easy-to-find.  Some homeowners use the same lender they used when they took out their first mortgage.  Other consumers shop local banks in their area.  However, one of the easiest places these days to find a home equity loan is on the Internet.  In fact, many lenders today offer online home equity loans, which permit borrowers to complete the entire home equity loan process from the lender’s web site. 

There are two types of loan programs generally used in conjunction with home equities: the Home Equity Loan and the Home Equity Line of Credit (HELOC).  The home equity loan allows a homeowner to borrower a lump sum of money.  This sum will be paid off in monthly increments over a specific amount of time.  The home equity loan rate will be fixed, meaning it will not change during the life of the loan.  This rate is usually lower than the rates offered by credit card companies on credit card debt. Also, the duration of a home equity loan is generally 15 years, whereas the length of a mortgage is usually around 30 years.  Therefore, a home equity loan will generally be paid off long before the original mortgage is paid.

In contrast, a HELOC operates similar to a credit card.  There is an amount of money set aside from which the borrower can withdraw. The borrower may choose to withdraw the entire amount all at once, or the borrower may take out smaller sums of money at intervals.  No matter how much of the initial line of credit is used, there is a set maturity date.  Once the maturity date has been reached, the lender expects the balance to be repaid in full, no matter how high or low that balance might be at the maturity date.  HELOC repayment periods are generally a time period of up to 15 years.      

The physical application process for either home equity loan is fairly straightforward.  There is no reason for a homeowner to be apprehensive concerning this stage of the home equity loan process.  The application is free and relatively simple for the average person to complete.  Home equity loan applications can be filled out and submitted in person, online, or by fax. 

Your chosen lender will be available to answer any home equity loan questions you might have as they come to mind. If a potential lender seems annoyed, hesitant, or uneasy about answering your home equity loan questions, be aware that there are literally hundreds of home equity loan lenders who prefer for their customers to be well informed prior to the completion of the loan application process. 

Information that a lender may request for the home equity loan application may vary.  Some lenders will require recent pay stubs and the applicant’s W-2 forms from the preceding tax year.  Other lenders require only one or the other.  The figures requested by a lender in the loan application will make up a portion of what the lender will use to determine the applicant’s eligibility for a home equity loan.  Despite any information provided in the credit application, a person’s credit report is usually the primary determining factor in whether a loan is approved by the lender. 

It is very important to keep all monthly payments current in order to maintain a good credit rating. Individuals with bad credit may still be eligible for a home equity loan in certain circumstances.  There may be slightly higher interest rates involved, or additional fees, but in the long run, this type of loan may still be available and advantageous to the consumer.  Very often to consolidate credit card debt with high interest rates into one smaller monthly payment will help a homeowner repair their credit, while saving money at the same time.

As part of the application process, the lender may also request a copy of the homeowner’s insurance policy.  It is also important to know that some lenders will stipulate that the applicants must take out lender’s insurance for any home equity loan that they grant.  This insurance does nothing for the borrower.  It simply protects the lender from any other possible lien holders.  There is a monthly charge for this insurance that the borrower will have to pay.

Some borrowers consider this fee to be beneficial in their particular situation.  However, if a borrower would like this fee removed from the loan documents, the borrower must ask.  If, on the other hand, the home equity loan lender is not flexible on this matter, there are options to consider.  A borrower can shop around for the best rate for this insurance, or the borrower can choose to look for a home equity loan elsewhere.

After the home equity loan is approved, documents are prepared for the lender and borrower to sign.  Signing options will vary depending upon applicable state laws.  In general, the borrower can sign this documentation and submit it via express mail, submit it with the aid of a title agency or attorney, or sign it in person.  A limited number of loan agencies may allow for a secured online signature.

A home equity loan can help control a consumer’s debt costs and save them a lot of money in the process. The more outstanding credit card debt a homeowner has accumulated, the more worthwhile the home equity loan might be for a borrower.  When a homeowner considers how much interest unsecured loans or credit cards may carry, a home equity debt consolidation loan becomes very attractive indeed.

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