A home equity loan is a way to tap into the value of your home. But since your home is the collateral for a home equity loan, if you default on it you may be at risk of foreclosure. If you're thinking about taking out a home equity loan, here's what you need to know.
A home equity loan can provide you with cash in the form of a lump sum payment that you pay back at a fixed interest rate, but only if you have enough equity.
Equity is the difference between the value of your home and what you still owe on the mortgage. Steadily paying down your mortgage is one way to increase your home equity. And if real estate values rise in your area, your equity can increase even faster.
A home equity loan gives you access to a lump sum of money all at once. If you know how much money you'll need and when you'll need it - to finance a remodeling project on a certain budget, for example - it may be the right choice.
The home equity loan will pay you back - principal and interest each month - at a fixed interest rate for a set number of years. Make sure you can afford this second mortgage payment, in addition to your current mortgage, as well as your other monthly expenses.
Generally, a home equity loan allows you to borrow 80% to 85% of the value of your home, minus what you owe on your mortgage. In this case you should check with your lender for current rates.
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A key difference between an adjustable-rate mortgage and a fixed-rate mortgage is the interest rate. An ARM loan usually has a lower initial interest rate than a fixed-rate loan. That means that the monthly payment during the introductory period of an ARM is lower than the payment on a fixed-rate mortgage.
However, after the initial interest rate period of the ARM, the rate and monthly payment may increase. Although there is a limit on the rate increase, the rate can increase significantly, and you could end up with an unaffordable monthly payment after the first few years of the loan term.
In contrast, a fixed-rate mortgage has a fixed payment for the life of the loan, and the rate and payment will not change unless you refinance to a different loan.
Another point of differentiation: ARM mortgages typically require a slightly higher down payment of 5 percent. In the case of a conventional fixed-rate loan, only a 3 percent down payment is required.
By using savvy Mortgage Services' advice you will be able to make the best decisions to obtain the best mortgage interest rate to finance the purchase of your new home.
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