Paying Off Your Home Loan

Posted on August 20, 2010 by admin

Securing a home equity loan or home equity line of credit can be an exciting moment. Receiving approval on a home financing loan can open the door to any number of life-changing options, whether it’s making much-needed improvements to your home or securing the funds to pay for a college education or emergency medical surgery.

But at some point the loan will need to be repaid and having a strategy on repayment beforehand can make the entire home financing process go that much smoother. For those with poor or bad credit, is it even more important to figure out a repayment plan, since their past poor credit repayment habits may arise again.

So before you enter in a home equity loan or home equity line of credit agreement, sit down and formulate a plan on how you will repay the loan. Make sure you fully understand the terms set down by the lender, and if there are any terms you do not understand, make sure they are explained clearly and that you understand them fully before you sign the papers.

Some home equity loans or home equity lines of credit determine a minimum monthly payment based on your credit history, which includes a pre-determined percentage of the principal or amount you borrowed, plus any interest that has accrued. However, it is important to note that because your payment goes toward the principal and the interest, you may not have paid enough to cover the principal by the end of the loan term (unlike a typical installment loan). There are also still some other types of home equity loan and home equity line of credit plans that may only allow you to pay the interest during the life of the payment plan, meaning you will have paid nothing toward the actual interest during that time. For instance, if you borrow $25,000, that is the amount you will owe when the length of the payment plan ends.

But thankfully, many lenders offer a choice of payment plans that allow you to choose to pay some, none or a portion of the principal during the life of the plan. But no matter what payment schedule you choose, at the end of the plan you will have to pay the entire amount owed, principal and interest. This is called a balloon payment and if you are unable to pay it off in full when the payment plan ends, there is the possibility you could lose your home.

Depending on your situation, you can pay the balloon payment in full, refinance it with the lending institution or pay it by obtaining a loan from a different lending institution.

In some cases, you may have a home equity loan or home equity line of credit with a variable interest rate (more common with a home equity line of credit), which means your monthly payments may go up or down depending on the Prime Rate. For instance, you may begin with an interest rate of only 10 percent but over time it may rise to 15 or 20 percent, which will increase your monthly payment (principal and interest). While most variable rate mortgages have a periodic cap or lifetime cap that limits how high the percentage rate can go, you should still be prepared to pay the higher end of the percentage rate if necessary. Also, make sure you check the margin on your loan as well. The margin is the amount that is added to the prime rate by the lender that determines the amount of interest you are charged. Finally, note that for a home equity loan, while the percentage rate may change, the terms are usually locked in at 10 or 20 years.

The other option is a fixed rate home equity loan or home equity line of credit in which the percentage rate is locked in for the life of the loan. Fixed rates are not connected to any federal index but usually simply a competitive advertised rate. It is to your advantage to check with various lenders for the lowest rate. And while comparing their annual percentage rates (APR) is a good rule or thumb, a truer comparison of their rates would be to check their other fees such as closing costs and points. This will give you a better idea of what you will end up paying.

When it comes to a fixed rate home equity loan or home equity line of credit, the advantage, as you might imagine, is that you can be assured of what your monthly payment will be regardless of the current economic conditions and that there is the possibility that you could end up paying far less in interest than the current Prime Rate. On the other hand, should the Prime Rate go down, you could end up paying more in interest than you could with a variable rate mortgage. But for those seeking a home equity loan or home equity line of credit, knowing exactly what your monthly payments will be might to your financial advantage. Also, some lenders may allow you to change a variable rate loan into a fixed rate loan so you may wish to inquire about this.

Lastly, know that if you sell your home, you will most likely be required to pay of your home equity loan or home equity line of credit in full right away. And while renting your home might seem to be a good option to not only generate funds to pay your existing home equity loan or line of credit while purchasing another home, some home equity loan and home equity line of credit contract terms do not permit you to rent your home during the term period.

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Despite Current Market Conditions, Home Finance Loans Are Available

Posted on August 20, 2010 by admin

As you no doubt know, the housing market has been hit hard by current economic conditions. During the boom of the early 2000s, Americans took out home equity loans and home equity lines of credit to the tune of almost $180 billion, money that was used to pay off other debts, for home improvement, to purchase big-ticket items such as cars and for college tuitions.

At its peak in 2006, lenders were approving home equity loans and home equity lines of credit of up to 100 percent and or more of a house’s value, while holders of a home equity line of credit were using the fund to purchase vanity items such as boats and luxury vacations.

But as the market for home equity loans and home equity lines of credit fell, interest rates rose steadily. Home equity loan rates rose from approximately 6.7 percent in 2005 to a current average of about 8.2 percent. Meanwhile, home equity lines of credit rose from 4.60 percent to a current average of 8.6 percent. Add to that the devaluation of many homes (currently, more than 23 percent of homeowners have a negative equity in their houses) and a crisis in American housing was born.

All of this has made it slightly more difficult for homeowners with poor or bad credit to secure a home equity loan or a home equity line of credit or manage the payments on their current loans. Lenders have become wary of approving loan applications as easily as they did in the past and have tightened their regulations. In addition, they have begun giving close scrutiny to the value of homes.

But despite this belt tightening, experts say that the difficulty in securing a home equity loan or home equity line of credit is really a return to the way things used to be conducted. Indeed, the current slowdown in approving home equity loans and home equity lines of credit is not to a fear on the part of lenders, but a reduction in the number of qualified borrowing candidates. Statistics state that the number of homeowners with less than 20 percent equity in their homes (the traditional minimum for approving a home equity loan or home equity line of credit) has risen sharply.

One lender has stated, “Most of the issues with issuing home equity loans and home equity lines of credit are on the qualification side of things. … You really need an 80 percent loan-to-value max. It’s not that the cash has evaporated, it merely being redistributed.”

But while the current home equity loan and home equity line of credit situation may appear desperate for some, there is a way to navigate the market and secure a home equity loan or home equity line of credit even for those with poor or bad credit.

First, modern borrowers might want to consider applying to smaller lending institutions. Larger banks have tightened their belt when it comes to issuing home equity loans, but smaller banks and lending companies have picked up the slack. But they haven’t totally relaxed their rules and are scrutinizing home appraisals closer that before, in some cases requesting more than one appraisal.

Next, experts recommend working to boost your credit score. The better the credit score, they say, the better chance a borrower will have of getting a home equity loan or home equity line of credit. Borrowers who have poor or bad credit will no doubt have to work on this aspect of their financial profile, but it will make getting approved for a loan much more likely.

Borrowers should also be prepared to confront the realities of today’s lending market. Depending on where you live, the value of your home may have dropped sharply or, at best, remained the same. For instance, residents of Texas may have been hand-cuffed by their state’s laws that hindered homeowner’s ability to take equity out of their homes, but that fact has kept many Texas homeowners from taking out exorbitant home equity loans and home equity lines of credit, then falling victim to the drop in home equity rates.

On the other hand, home equity loan and home equity line of bad credit holders in other states suffered big drops in the value of their homes and now find it difficult to get approved for a loan or line of credit, regardless of their credit score.

Experts also recommend shopping around for the best rates and terms and make sure you can afford it. Homeowners, they say, should keep rising property taxes, insurance, upkeep and other common and unexpected expenses in mind when determining the amount of the home equity loan or home equity line off credit.

And if you already have a home equity loan or home equity line of credit, the experts recommend reviewing it with an eye toward refinancing into a fixed-rate option before the rates rise. Be wary of any prepayment penalties.

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Knowing Tax Laws

Posted on August 20, 2010 by admin

If you have a home equity loan or home equity line of credit and have poor or bad credit, the last thing you need is to run afoul of the Internal Revenue Service in the process. Or worse, you may fail to take full advantage of the possible tax deductions related to borrowing the money.

Learning the tax laws associated with taking out a home equity loan or home equity line of credit is an important step in deciding on the type of loan you need. Yet many people often skip or don’t even consider this procedure, and they often end up paying taxes on their loans when they shouldn’t.

Perhaps the most important move is to itemize your home equity loan or home equity line of credit interest. Experts say that fewer than 35 percent of tax filers bother to itemize their loan interest and those that do are usually have a much higher income than those who can most benefit from the deduction.

For those who do itemize their deductions, remember to place the mortgage interest on Schedule A of the tax form. You may wish to calculate the possible deductions with a tax software program like Quicken or TurboTax, or consult with a tax professional to determine if deducting your home equity loan or home equity line of credit interest is to your advantage.

Once you determine if deducting the interest on your home equity loan or home equity line of credit is to your advantage, you should next determine the amount of interest the IRS allows you to deduct. The IRS permits you to deduct interest up to $100,000 and applies to all forms of home equity loans and all home equity loans you have at the time. The IRS makes exceptions to the $100,000 limit in the case of loans related to a business, such as installing a home office or if you rent out part of your property (which can be deducted as investment interest).

Next, to be able to deduct the interest of the loan, the loan must be secured by your house. If you obtain a home equity loan or home equity line of credit that boosts the total amount of your mortgage liability above the value of your house, any interest that exceeds the market value of your house is not deductible. This is true even if the equity debt of your home is less than $100,000.

If you take out a home equity loan or home equity line of credit with the goal of home improvements, this is considered an acquisition debt and is deductible as mortgage interest (if the total mortgage debt does not exceed $100,000 or $50,000 if you are married but filing a tax return separately). An acquisition debt can also be a second mortgage taken out to buy a home. Also, if you perform a “rate and term” refinance (aimed at changing the interest rate and terms of the loan) but do not take out any additional money, this can also qualify as acquisition debt.

With a home equity loan or home equity line of credit, you are not allowed to deduct interest points (a percentage of the total loan amount) in the same year that you pay them, but you must amortize, or schedule payments, over the span of the loan. For instance, if you close your home equity loan or home equity line of credit and pay a point of $5,000, you are not allowed to deduct $5,000 in that particular tax year. You are only allowed to deduct a percentage of the $5,000 each year that you have the loan. If you refinance your loan, however, you are allowed to deduct the remaining balance of the point for that tax year.

Finally, if you received your home equity loan or home equity line of credit prior to October 13, 1987, it is considered a grandfathered loan and all interested paid on a grandfathered loan in any year is completely tax deductible. There are special exemptions and conditions beyond that point but many of the rules and conditions are not applicable to most homeowners.

As stated before, it’s probably a good decision to consult a tax professional on tax issues pertaining to home equity loans and home equity line of credit. The Taxpayer Advocate Service is a not-for-profit independent group that operates within the IRS and assists taxpayers who need help with tax issues. TAS is a free service extended to taxpayers who have not been able to resolve tax issues through normal IRS channels.

Also, you can get free help with your tax return from the Volunteer Income Tax Assistance program (VITA), a program that assists low-income tax payers and offers free e-filing of your return and can inform you of all possible deductions.

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