Shopping for a Home Equity Loan

If you are planning a big project, and thinking about financing it by applying for a home equity loan, you need to take two preliminary steps.  You first need to decide which type of home equity loan is right for you.  After you have done this, you need to begin the actual application process by qualifying for that loan.  The following information and tips will help you make a well-informed decision and have a positive shopping and application experience.

Knowing what type of loan to apply for begins with picking the one that best suits your needs. With a variety of lenders competing for your business, choosing one because it has the lowest mortgage rate shouldn’t be your only consideration. The two types of home equity loans are a Home Equity Loan (HEL) and a Home Equity Line of Credit (HELOC).  Both are secured by the equity in your real estate, and the interest on both is usually tax-deductible. But they also have several differences. Deciding which one is better for you begins with answering some basic questions:

• What are you planning to use the loan for? Depending on the purpose for the loan, you might prefer one lump sum (which you would receive with a home equity loan), or the flexibility of ongoing access to your funds (which a home equity line of credit offers).

• For how long do you intend to use the money? If you need the money for a long period of time, then a home equity line of credit, which offers ongoing access to your funds, might be better for you.  But if you only need the money right now to make one payment, then you should probably look into getting a home equity loan, which gives you the money in one lump sum.  Also, a home equity loan is a fixed-term loan, whereas a home equity line of credit is a revolving credit account, meaning that there is no term.
• How much will it cost to repay my loan? If you would prefer having a steady, fixed payment over time, then a home equity loan is what you need.  But if you would rather have a variable payment, knowing that the interest rate can change at any time, then a home equity line of credit is probably better for you.

Available Credit
Typically, most financial institutions will let you borrow as much as 80% of the Loan-to-Value (LTV) - the amount of a mortgage loan divided by the appraised market value of your home - less any outstanding mortgage payments on your property.  However, some institutions may allow you to use up to 100% of the equity in your home.

When considering your available credit line, the lender may take into consideration other factors including your past credit history, your current income, and your ability to repay a loan.  After your credit history has been evaluated, a report will be generated which includes your credit score and lets lenders know whether or not you are a good borrower.

Your credit score is calculated by the Fair Isaacs Corporation (FICO), which accesses the three main credit reporting bureaus (Equifax, TransUnion, and Experian).  Credit scores can range from as low as 300 points to as high as 850.  People with average credit usually score around 620, good credit at 660, and excellent credit above 720.

Anything less than good credit, such as a car repossession or bankruptcy, may fall into the sub-prime category, which usually places borrowers in a higher interest rate category.  Once approved, borrowers can withdraw money up to the available amount, usually by check or credit card.

You can build and maintain a good credit score by always paying your bills on time, and by keeping a good utilization ratio.  This means using less credit than is actually available to you.  FICO scores are based on your rating in five general categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%).  Whether you are new to using credit, or have been a long-time borrower, keeping these categories in mind and maintaining responsible borrowing habits can help you strengthen your credit score.  And this strengthened credit score will help you to qualify for a better home equity loan or line of credit . When qualifying for a loan, always shop online for the best home equity credit terms that meet your specific needs

Source: Informa Research Services