Equity mortgage is defined as “a mortgage in which a lender offers a favorable interest rate in exchange for a portion of the profits when the borrower sells the home”. Equity is the value of the home minus the payments on the mortgage. This usually happens when the borrower used their home as collateral to secure a large amount of credit. Equity loans can either be (1) home equity loan, also known as a second mortgage where the borrower gets a lump sum that he or she must pay after a certain period of time; (2) home equity line of credit where the borrower is given a credit card that is funded by the home equity. Interest rates are both applicable on the two instances, however, when they start to accrue differs. In a second mortgage, the interest rates start immediately after the lump sum is released while in the line of credit equity, the interest does not accrue until your equity (your home) is purchased.
Advantages of a Home Equity Mortgage
An equity mortgage has the purpose of helping the homeowners in emergency cases and in situations where a large amount of money is required such as in weddings. Usually, homeowners will resort to equity loans or second mortgages for this. Having equity is also a powerful thing because with it, you can buy a summer home, a new car, maybe even go on a vacation.
It can also be beneficial in terms of taxes because you can deduct interest paid on equity loans and equity lines of credit from your income tax. If you want to improve you home by adding a swimming pool, repaint the whole house, building a larger garage, anything to make it increase its market value, you can draw funds from your equity. It can also be helpful in paying off other debts and save yourself from bankruptcy.
It can also benefit senior citizens in supplementing their income as well as funding their healthcare needs. It can secure you and your family a cash reserve in times of need. A home equity mortgage also has a lower interest rate than consumer loans, credit cards and auto loans. A home equity is therefore a very valuable asset.
Disadvantages of a Home Equity Mortgage
There is, however, a danger when it comes to getting an equity mortgage. Because of it being tax-deductible and having a lower interest rate than most loans, some people find it tempting to transfer their existing debt to their equity mortgages. Research has shown that within two years, people who do this will have as much or more credit and consumer loans on top of their equity mortgages.
You also run the risk of losing your home in case you don’t repay your debts. However, as a second mortgage, the prior mortgage would be settled first. There is also a current slump in the American real estate industry so consider the economic situations first before you take the plunge.
Considering an Equity Mortgage?
However, there are certain things that one should consider before embarking on a second mortgage. A mortgage in any form is always a commitment and you are putting your home in line so careful planning is required in this case.
- First, determine what type of equity mortgage you’ll be getting. It will depend of course, on your needs. If you have an immediate need for a large amount of money, a second mortgage will be appropriate. If you need to spread your loan over a long period of time (such as in the case of basic necessities), a line of credit would be more proper. Also, read the terms and conditions of the mortgage contract before doing anything. Consult with a lawyer or a financial adviser because as a commitment, you can’t renege on your contract once the deal is done.
- Second, choosing the type of equity loan will determine when your interest rate would start. A second mortgage will have the interest running immediately while the line of credit will depend if you sell your home or not. Also, with a second mortgage, the annual percentage rate will be based not only on the agreed interest rate but also on finance charges and other fees. An equity loan based on a line of credit will exclude the calculation of interest rates but there will be fees and service charges.
- Lastly, consider your repayment options. Consolidation of your debts could be one. You can also pay off your debts by starting with the interest first and slowly paying off the principal amount. Consider also realistically how much you can pay monthly. It is easy to enjoy the ready amount of cash on the first few months, so plan ahead. Set a monthly amount to pay off your equity loan as well as other debts. The earlier you repay your debts, the lesser chances of you going to bankruptcy.
Sound Tips From Financial advisers
Remember that real estate is also a business. And with business comes profit. You have to consider that you and the lenders aim to get money from this so you have to be very careful when applying for equity mortgage.
- Be honest when it comes to your credit information. If you have bad credit history, you cannot hide from it. And you cannot just get an equity mortgage without disclosing the full extent of your credit history. There are three credit bureaus in the United States: TransUnion, Experian and Equifax. They have an extensive record of all your credit dealings and mortgage companies have the power to request this information before they deal with you as borrower. If you do not tell them that you have poor credit, they will think of you as a suspicious person and most likely reject your credit outright. Telling them will give you a chance to defend yourself before they make their decision.
- Don’t give your credit information around indiscriminately. If a large number of lending companies ask for your credit rating from the three bureaus, your credit rating will drop a notch. Choose brokers and banks that you think are trustworthy enough to be entrusted with your credit score and which you think will approve your credit.
- Scams are very common so beware. There are a lot of unscrupulous people out there and will try to scam you out of your money every chance they get. So be careful when dealing with brokers and private lending institutions. Make sure they have the proper accreditation or choose one that a close friend has used before. This is your home and hard-earned money that we’re talking about so careful planning and research is required.
Majority of the economists and financial advisors today are giving dire predictions of the real estate industry and says that the mortgage market is in upheaval. The equity market which was booming in the early part of the 21st century is now spiraling down. Jay Brinkman, an economist (in an article posted at creditcollectionsworld.com) blames the investors who flooded the markets in the past decades with tempting equity mortgage deals. More and more homeowners abandon their homes with ridiculously low prices.
In January of this year, foreclosure proceedings jump to 57% compared to last year. Across the country, 233, 001 homes have already received a notice for overdue payments compared to 148, 425 last year.
But the future for equity mortgage is not bleak. Even though the industry is suffering, statistics have shown that consumer demand for equity has actually risen. It shows that the market rose to 5% from last year and the number of policies increased by 5.5%. Dean Mirfin, a business development director, says that the demand for equity remains largely unaffected by the slump in the real estate industry. He says that the media has actually been spreading unnecessary news of gloom in terms of real estate that the equity mortgage side might get affected by this. He assures people that it’s not true.
Alvin James, a San Francisco resident and senior citizen says he has profited much from investing in the 1970’s in his home, improving it gradually. He says it now pays for half his medical bills and even took a cruise to the Bahamas last year. Thanks largely to the Baby Boomers generation which are now reaping the benefits of their investment, so home equity mortgage is till going strong.
A large number of senior citizens above 62years old like James can still rely on their equity mortgage. The government is doing there part in protecting this aspect of real estate industry and although the slump is a reality, we can still expect to see bright things from equity mortgages in the future. Financial advisers and economists say that if it is still possible to hang on to your home, do so because in a few years, they are predicting another boom that will make your houses increase twice or thrice-fold in prices. Belt tightening, as well as saving on daily commodities can also help. In a few years or so, homeowners can take advantage again of a renewed surge in equity mortgages.