Preparing For A Home Loan

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There is nothing more exciting than applying for a home loan to purchase a house! But with so many choices, the very last thing you want to get tangled up in, is bad credit loans. But thankfully, there are many guides and answers out there to help you avoid these situations, and help you get into your dream house quickly and easily!  Just imagine yourself decorating your new home this spring or enjoying mimosas on the deck with your spouse- it is all possible with the right steps!

Here are the answers to six basic questions which may make it easier to understand home loans.

What is a Home Equity Loan?

A home equity loan is a loan secured by the applicant’s home. That means the lending institution collateralizes the house when the loan is funded. This gives the lender a right to foreclose, repossess, and sell the property if the applicant’s default on the loan.

What Homes Qualify?

Most property that’s zoned residential should qualify. Single-family homes, townhouses, and condos are commonly used as collateral to secure home equity loans. Mobile homes that pay lot rent and homes being used for a business may be disqualified depending on the lenders guidelines. Log homes, earth shelters, geodesic domes, and other unique homes may also be disqualified.

What is Equity?

In real estate, equity refers to the value of the property minus what is currently owed on any loans secured against it. For example, if a lender determines that the fair market value of a house is $100,000 and the remaining loan amount is $75,000 then this homeowner has $25,000 of equity in the home. (100k-75k=25k) Technically speaking this homeowner could take out a home equity loan against the house in the amount of about $25,000 depending on the lending institutions guidelines.

What is a Loan?

A real estate loan is a legally binding financial contract in which the applicant borrows money from a financial institution and promises to pay it back with interest. They pledge the house as collateral for the loan in return for borrowing large sums of money at a low interest rate which is usually tax deductible.

What is a Fixed Home Equity Loan?

The fixed home equity loan, also known as an HEL, is a standard type of loan similar to a car loan. The borrower takes a lump sum of money up front, spends it, and pays it all back over a specific period of time, usually between 5 and 15 years. It is called a fixed HEL because it maintains the same payment and interest rate for the life of the loan.

What is a Variable Home Equity Loan?

Variable home equity loans, also known as HELOC’s are much different then fixed HEL’s. They are more similar to credit cards. The borrower is granted a credit limit on which they can withdraw from and make payments to at any time during the life of the loan. They are called variable HEL’s because the balance of the loan, the payment due, and the interest rate can change at any time. The interest rate on HELOC’s is usually tied to the Current Wall Street Prime Rate.