What Are Home Equity Loans?

A home equity loan is simply borrowing on the difference of the value of your home and the outstanding mortgage on the house. Lets say, you have bought a home worth $50,000 some time back, after making a down payment of $5,000. The value of your home has now appreciated to $60,000. The difference between the present value of your home ($60,000) and the outstanding payment ($45,000) is $15,000. This is the amount of the home equity loan that you can apply for.

Home equity loans are normally called second mortgages, as they are normally for a lesser tenor than an existing first mortgage. However, one "caveat" that borrowers need to be very careful of is that in the event of default, the lender can foreclose on the house. Home equity loans have become hugely popular recently because of falling interest rates and tax deductions on interest repayments. Moreover, since a home equity loan has the house as collateral, the interest rates on such loans are normally lower than on other types of loans.

Due to the nature of a home equity loan, borrowers normally belong to the middle-aged bracket earning a decent income. As a result of this, the default rate among home equity loan borrowers is very low.

There are two broad types of home equity loans:

Fixed loans, which are very good for people who want some discipline in their repayment schedules. These are just like a normal term loan.

Line of credit, (HELOC) which offers more flexibility to the borrower in terms of repayment schedules and floating rate of interest.

So, still waiting to remodel your home or buy that set of wheels? Go for that home loan now!

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Mortgage Lenders Come Under Congress Home Loan Scanner

Will the Congress come to the rescue of consumers to initiate reform of home loan mortgage lenders? It may. The Democrat-led Congress may submit legislation to place stringent measures to curb abuses within the mortgage industry.

The mortgage industry includes not only mortgage lenders, mortgage brokers, but also home builders who own mortgage companies, Wall Street, and other mortgage security investors. If stringent measures are implemented by Congress, it will protect future consumers from being exploited. However, it may have an ancillary effect in that it may protect purchasers of mortgage backed securities. The recent past has seen unmitigated mayhem in the market. Countrywide Financial's second quarter profits dropped, leading to a fall in share prices to a 52 week low on July 24, 2007. Its second-quarter net income dropped to $485.1 million from $722.2 million, a year ago with revenue falling 15% to $2.55 billion.

This week American Home Mortgage, a large national mortgage lender announced that it may not be able to fund current inventory of home loans in excess of $300 million dollars, sending its stock value plummeting by 90 %. But the subprime mortgage disaster is affecting even prime loan lenders and borrowers.

Wall Street is also reeling from the rise in foreclosures, oversupply of homes, subprime mortgages, defaults, and more. Nevertheless, Wall Street is complicit along with home builders and mortgage lenders in creating this problem.

Beazer Homes, one of the many homebuilders that started or increased their mortgage lending business to facilitate the buying of their homes. However, allegations are now surfacing from former homeowners who have defaulted on their mortgages that some builders inflated their income or altered some material facts on the mortgage applications in order to get them approved. In order to get homes sold many financially unqualified people were approved for mortgages and other home loans such as mortgage refinancing.

The housing market boom of the recent five years was due to many diverse factors. Banks, mortgage companies, and homebuilders relaxed their lending standards and flooded the market with mortgage loans, along with loans to people with questionable credit. Unlike before adjustable rate mortgages were doled to increase their bottom line. The folks on Wall Street stimulated this reckless mortgage lending behavior by continuing to buy huge quantities of home loans for repackaging as securities. Many of these mortgage backed securities contained risky subprime mortgages.

Now that the housing bubble has burst, rising foreclosure rates, oversupply of homes, increasing mortgage rates, less home buying demand, and the negative residual effects upon the economy is leading to closer examination by government into the role of mortgage lenders, home builders, and Wall Street.

The Congress wants to reign in the Wild West lending tactics by imposing strict lending guidelines. But that may not be required if the Federal Reserve recommends new consumer protection rules this year. So, the Congress may not have to act if the Fed constraints misleading loan practices among all lenders. Hopefully, national lending standards need to replace the various state rules because the mortgage investment market is a national one.

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Dangers of Reverse Mortgages - Top 3 Things to be Aware of

As the baby-boomers prepare for retirement reverse mortgages are going to be the next mortgage boom according to most analyst. The baby boom began in 1946 and continued through 1964. During those 19 years, 76 million people were born. As this segment of America begins to retire a large portion of them will need to rely on their homes equity to make "ends meet." How they access that equity will be the mortgage industries primary focus in the years to come.

The traditional "forward" mortgage has the homeowner borrow the money by way of a traditional mortgage or home equity line and make payments on that amount. The homeowner takes the money, places it in a safe interest bearing account and uses the money to augment their income. The interest that is earned on the money is used to supplements the monthly payment that the homeowner has to make. The problem is that the interest shrinks as the money is used and the mortgage payments stay the same.

Reverse mortgages have actually been around since 1989, but their popularity is skyrocketing as a result of the wave of baby-boomers that are retiring. These mortgage products are safe and beneficial when applied to the right homeowner and circumstances. Lendfast.com recommends that borrowers use FHA-insured Home Equity Conversion Mortgage (HECM) when considering these mortgage products. Getting a reverse mortgage from the private sector may include more headaches and costs. However, as with financial product, there are some dangers that you need to be aware of; here are the top three reverse mortgage pitfalls to lookout for.

1) Repayment and Forfeiture - Most, if not all reverse mortgages will not require you to make payments or repay the loan for as long as you live. Once you pass on your heirs will have the opportunity to remortgage the debt or sell the house and repay the loan. If the home has equity above the amount owed to the bank your heirs will receive those proceeds. If the home is "upside down" your heirs have no obligation to repay the debt, but they will forfeit the home unless they pay the amount owed.

However FHA rules state: "When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender." The danger here is "no longer use it for your primary residence. This means if you have to go to a hospice, nursing home or intend to live in another home and use the house as a second home the bank will call the debt due. This is definitely something you want to consider before taking out a reverse mortgage.

2) Cost and Interest Rates - At the inception of reverse mortgages they were almost exclusively offered with adjustable interest rates. Adjustable rates are still standard practice and you are almost certain to be offered this option to begin with. Don't! There are fixed rate programs available now and at today's rates adjustable rates are only going to go up in the future. It's easy to be lured into an adjustable rate because lower interest rates in a reverse mortgage have higher monthly payments. If the interest rate increases your payment decreases, as does the time frame you have to draw on the mortgage. Just remember, adjustable interest rates are a gamble and Las Vegas wasn't built on winners.

A considerable downside to reverse mortgages is the high up front costs. This cost can be compensated by a lower interest rate over time, but some seniors choose other options to draw on their home equity. Reverse mortgage closing costs should be about the same as most loans except the 2% mortgage insurance premium that FHA charges to insure the loan. FHA insures the lender will be paid regardless of the home's value when and if the lender has to take over the property.

At Lendfast.com we have noticed that many homeowners are paying higher closing costs for reverse mortgages than traditional forward mortgages. We believe this is because most homeowners are unfamiliar with reverse mortgages and tend to not shop around as with traditional mortgages. This is why we recommend the FHA insured type of reverse mortgages because they have closing cost limits that lenders must abide by. Always get two quotes or use the "lenders compete" method to apply for a reverse mortgage. You should also read How Does a Reverse Mortgage Work an article that explains reverse mortgages better.

3) Upkeep, Taxes and Insurance - On traditional mortgages your escrow payments are added to your payment but they are subtracted from your monthly check on a reverse mortgage. Most of the time you will be shown the monthly amount you will receive each month BEFORE the escrows are taken out. This means that you could sign up expecting to get $900 per month and only receive around $700. Make sure you are given the monthly payment LESS your escrow payment. Like most mortgages you will usually be given the option to escrow or not to escrow, however the bank has a vested interest in your home. Meaning if you do not maintain your insurance and taxes as they deem responsible they can call the loan or force an escrow account on you.

When you consider that the bank is basically buying your home you can understand why they would want you to keep their property in good shape. The problem is that this loan is being made to senior citizens. As they age they may become unable to do the necessary maintenance that the bank requires."Good shape" can mean thousands of dollars out of pocket for the homeowner when you consider what a new roof or a fresh coat of paint costs these days. Ask the loan officer what the lenders policy is on maintenance and repair. You may want to take enough money up front to have future repairs taken care of so that your monthly payment stays the same.

Aubrey Clark is a syndicated writer on financial matters and the editor for Lendfast.com. He writes extensively on lending topics like finding the best Atlanta mortgage rates and how investors obtain Georgia low mortgage rates. Article Source: http://EzineArticles.com/?expert=Aubrey_Clark

Is a Reverse Mortgage for Senior Home Owners a Good Idea?

There are many senior home owners in the position where they have a lovely house with no mortgage on it, but very little in the way of cash to live on. This has led to an increase in people looking at the possibility of getting a reverse mortgage.

A reverse mortgage is a special type of loan that is made to homeowners that are 62 years old or over. The lender will give the home owner either a lump sum, line of credit or a monthly income. In return, the loaned amount is repaid when the homeowner dies, moves out of the property, or sells the house. One of the main attractions of the reverse mortgage is that there are no monthly repayments as with a normal mortgage.

For this reason, a reverse mortgage can be a good idea for seniors that are in the position of being "equity rich but cash poor". They are able to stay in their home and use the money for any number of uses. A monthly income could be used to supplement a pension. Alternatively a lump sum could be used to carry out modifications to the house or pay for healthcare.

But it should be remembered that this is not "free money". The amount of equity that is in the house will be reduced when you come to sell it or pass it onto your family. This is something that needs to be discussed and fully understood. It is a good idea to talk this over with your children. There are also housing counseling services that will give you unbiased advice whether this is a good option for you.

There are many benefits that reverse mortgages can offer senior homeowners. But it is essential that you enter into this type of loan knowing all the facts and how it will affect the equity in your home.

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