4 Rules for Your First Home Equity Loan / Line of Credit
For most first-time home owners, obtaining a mortgage and buying a house is the largest financial transaction they have ever made. For home owners seeking a home-equity loan / line of credit, they are likely to get their hands on the largest amount of cash they have ever had. While the process of getting a mortgage, home equity loan or home equity line of credit (HELOC) may seem intimidating, if you do your homework it can be fairly simple and straightforward.As a part of your mortgage and home equity loan line of credit homework, remember these 4 rules:
1. Don't take the first offer that you get. As the person seeking a mortgage, home-equity loan or HELOC, you might think that you are at a disadvantage. Actually, you are in the driver's seat, because if you don't get the mortgage or home equity loan line of credit then the real estate agent doesn't get paid and the mortgage company doesn't make any money. Everyone involved in the home purchase wants you to get it. Mortgage firms will often give you a Pre-Approval letter which tells how much they are able to lend to you.
2. Buy less house or borrow less money than the mortgage company will allow. Everyone involved in home equity loan line of credit or mortgages is paid a percentage, so they may encourage you to borrow right up to the maximum that your lender will allow. For peace of mind, stay away from the maximum, get less so you will have some financial breathing room. Your worries will diminish if your mortgage or HELOC payment is low enough to allow you to save some money each month for unexpected emergencies.
3. Select either a fixed-interest or adjustable-rate home equity loan & line of credit. With a fixed-rate HELOC, your interest and principal payments generally stay the same for the life of the loan (often 30 years). With an adjustable-rate instruments, your payments vary as national interest rates vary. If the monthly payment difference is small, most advisors recommend going with a fixed rate mortgage to avoid unpleasant surprises if the national economy hits a period of high inflation. If your advisor says not to worry because he can predict future inflation rate, find another advisor.
4. Look into a home equity loan line of credit after you have built up some equity. Interest rates rise and fall. A few years after you have purchased a house, you may be able to refinance the loan and save substantial amounts on your monthly payments. Be careful that you are dealing with a reputable lender, and read and understand any forms they give you to sign. Will you wind up owing more in a few years than you do now? Can the interest rate jump up sometime in the future? Will there be a lump-sum "balloon" payment due? Those are all warning signs that you may be looking at a bad refinance loan.
Getting that first refinance can seem daunting, but with a little preparation you can sail right through it.