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How a Home Equity Loan Works!

sometimes home equity feels like you're

a rock in the middle of a river and the

river water is overtaking the rock where

I'm going with this is is that whenever

you're in your house you're paying your

mortgage on time and you've been there

for a while your home equity just starts

swallowing up the rock and you keep

thinking well I'm just paying it down

and paint it down and paint it down well

sometimes people realize hey you know

what I actually got like a lot of home

equity

I want to tap into this how do I do that

let's talk about a home equity loan and

see if it's right for you my name is

Andrew Finney and my passion is helping

you make sense of real estate if you

need help finding a top agent near you

or if you simply want to drop me a line

they'd say hello my contact info is

below if you're new here please go ahead

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this video thank you alright my friend

let's take a closer look at this because

maybe you're like hey my home is worth

seven hundred thousand dollars but I

only owe five hundred thousand dollars

of my mortgage where is this other two

hundred thousand dollars and can I get

some of it or can I get all of it well

in short yeah you can it just depends on

how you do that one way to do that is

what's called a home equity loan a home

equity loan is often used

interchangeably with what's called a

second mortgage and you might be saying

well I already have a mortgage how does

that work it turns out that you can

actually borrow against the equity in

your home and in this case a second

mortgage also known as a home equity

loan might be an option for you there

are other opportunities as well and

we'll explore them and touch them just a

little bit in today's conversation but

for now let's explore the home equity

loan the first thing that know is how

does the home equity loan work

essentially a home equity loan can be

used to tap into that $200,000 of home

equity that you may have from our

example we made earlier so when you're

talking about that the reason that this

could be a little bit easy to qualify

for us because you're actually putting

up your house on the line as collateral

and right there some people say hey you

know right there if I got a

collateralized my house to get that loan

it's not right for me and yeah others

Behe you know I'm okay with this idea of

a second mortgage tell me more well

that's for you

let's move on the point to which is

knowing the difference between a home

equity loan and what's called a HELOC a

HELOC is an acronym for a home equity

line of credit

more than likely you've heard of both of

these terms the home equity loan and the

home equity line of credit

often just call

HELOC and you're probably thinking well

what's the difference well it turns out

they're pretty big so let's take a look

at each one of them with a home equity

loan you're gonna be able to take out a

lump sum of cash up front and you'll

repay it over time with a fixed monthly

payment kind of like your mortgage hence

why people often just call it a second

mortgage you're gonna have that fixed

monthly mortgage payment your interest

rate will be set on how much you borrow

and when you borrow and it should be

remaining a fixed rate for the life of

the loan you want to review that of

course with the loan ah so that you take

this out with each monthly payment will

reduce your loan balance and cover some

of your interest cost which is

oftentimes referred to as simply

amortize the loan now with a home equity

line of credit you don't we see the lump

sum at one time essentially what this

option will let you do is let you borrow

from it multiple times the same way that

you could with a credit card that you

probably have in your wallet or your

purse now I would caution you to be

careful as using your home equity as a

credit card all the same this does to

better define the difference between the

home equity line of credit a HELOC and a

home equity alone home equity loan think

of it as a second mortgage that you're

going to be paying monthly installments

on and you're getting a big lump set of

cash back to you for the home equity

portion whereas a home equity line of

credit

well you just tap it into your home

equity kind of like a credit card and it

is important to remember that with a

home equity line of credit that a lender

could actually freeze your credit the

same way that they could do with your

credit card so you want to make sure

that you're making the decisions that

are right for you and refueling your

options if you're considering either one

a HELOC or a home equity loan with the

loan officer that you choose to proceed

with make sure that you understand all

the terms and all the conditions and

what happens with it over time the third

thing that you want to know is what are

the repayment terms and plans available

to you for the home equity loan you want

to know what you're locking yourself in

to going back to when I said a moment

ago it should be a fixed-rate well what

happens if a loan officer offers an

adjustable rate do you really want that

you need to explore these terms and make

sure that you understand what you're

doing upfront and their reasons why

you're interested in tapping into your

equity as a professional I always

believe it's best not to tap into your

home equity unless you absolutely need

to or there's a reason for it a desire

that you might want to go out and buy a

rolls-royce is not generally a good

reason to tap into your home equity so

if you have medical

Bill's or you have situations where you

have grandkids or kids or yourself going

to college and you want to pay off your

student loans okay balance out the

interest rate see if it's gonna be right

for you all at the same time make sure

that whatever you choose to do with your

home equity and with your house you're

making a well informed decision that's

right for you only way to do that is to

dig into those details that are

oftentimes boring and sometimes

cumbersome but all too often so

important to us because if we don't make

good on what we agreed to

ignorance of what those terms were isn't

going to hold up and we're gonna be on

the hook with that decision that we made

and we might look back our future stuff

might look back with 20/20 hindsight

saying hey I wish I would have done that

or hey I wish I would have asked this

extra question that's why we're having

the conversation now so let's take a

look at three of the pros and three of

the cons of the home equity loan one of

the pros of a home equity loan is that

you can claim a tax deduction for the

interest if you pay it to use the loan

to buy built or substantially improved

your home so when sometimes people ask

what are the different types of loans I

could take for home improvement a home

equity loan could technically be one of

those now of course I'm not a tax

advisor so the best thing that you could

do here is make sure that you're getting

up with your tax advisor to see where

the current tax code is for the use of a

home equity loan and see if in fact if

you are planning to buy build or

substantially improve your home what the

tax code is looking like and what your

tax deductions may look like with a home

equity loan for that current tax year

the second Pro is that you'll probably

pay less in interest than you would on a

personal loan because a home equity loan

is secured by your house so you could

get a lower potentially a lower interest

rate now all the same you want to know

exactly how that works and keep in mind

the devil´s and the t bills right just

so that this type of loan is secured by

your house which means if you don't make

good on it could lose your house the

third Pro is that you could borrow a lot

of money if you need it to depending on

how much equity is in your home with

everything that's good there's always

some other things that we need to see on

the back side of that coin and make sure

it's good things so let's take a closer

look at the three cons that you need to

be aware of the first one is that you

could risk losing your house in a

foreclosure if you weren't making your

payments on time keep in mind this is

why a home equity loan is often called a

second mortgage you're securing a home

equity loan with your house so you have

a first

mortgage and a second mortgage if you

don't make good on either one of them

you could potentially be foreclosed upon

and lose your house generally for

reference if you miss three months of

mortgage payments you risk initiating a

notice a default situation which is the

first step in a foreclosure proceeding

please make sure that you completely

understand what you're doing here the

second one is that you'll have to pay

this debt off immediately and in full

anytime that you get ready to sell your

home just as you would with their first

mortgage so when you meet with a trusted

real estate adviser to review your

listing options they're gonna ask you

how much do you owe on your mortgage

you're gonna have two mortgages that you

need to share with them so they can

balance out what's called an estimated

net sheet and show you about how much

money you should be able to walk away

from after you sell your home obviously

we need to make sure that the market

trends indicators and conditions are

right for you to recoup the cost of

tapping into your home equity loan and

the third thing is you're gonna have to

pay closing costs so unlike what's like

a home equity line of credit where it's

essentially like a credit card whether

generally a variable rate the way a lot

of credit cards are - right so with a

home equity loan you're actually gonna

have closing costs home equity line of

credit not so much but always review the

details with the lowness or whether

you're choosing a home equity loan or a

home equity line of credit make sure

that you're making the right decision

for you please the fourth thing is how

do you get a home equity loan well you

could go back to the same person that

assisted you with the current home that

you have you can obviously go on the

Google and simply type in home equity

loan providers and see what's going on

with them check their online ratings

check their online reviews and check out

what other real families just like you

are saying about them to find which ones

that you want to contact go ahead and

apply with some of them if you're

serious about pursuing this option so

that you can review the loan estimate

I'll go ahead and pop up a card about

loan estimates now so you can take a

closer look of it and make sure that you

know how to understand the loan estimate

and what you need to be looking for what

you can do is check those rates check

those terms ask the questions that are

in your mind's eye about the home equity

loan and how that company will work

moving forward with this type of a loan

the fifth thing that note is what if you

have poor credit can you get a home

equity loan it's quite possible it just

depends on how bad your credit is now

obviously hopefully you had at least a

620 or 640 when you purchased your home

but we all know that like

happens sometimes things set us back

sometimes someone gets sick you can't

work you can't pay a bill on time and

your credit score takes a hit well what

happens if you need to tap into some

cash for an emergency-type situation

right first of all it's not exactly the

best idea to tap into your home's equity

it would be better frankly to sell the

house and downsize into something that's

more financially prudent for you all the

same this is your life it's your story

you got to plan this out in the way that

she believes best and right for you that

being said if you have a low credit

score will you be able to get a home

equity loan only one way to know for

sure is to contact that loan officer

more than likely depending on how much

equity is in your home that loan officer

may give you the loan because they're

gonna collateralize your house and they

know they can foreclose on you and get

their money back because your home

equity loan is associated with your

house and it's your house the roof over

your head that's on the hook here if you

don't make good they know that so

they're like hey if you're gonna be a

riskier investment great you're gonna

get a higher interest rate on the front

side of this and oh by the way we're

gonna go ahead and take your house if

you don't make good and you miss three

payments make sure that you're making a

smart move here as a side note please

keep in mind that you're still going to

have to go through the mortgage

application process here and you're

gonna have to have your debt to income

ratios evaluated like you did whenever

you purchase your home they're going to

need to verify your income your assets

your credit in your employment situation

to ensure that you have the financial

ability to repay both the first mortgage

and the second mortgage in this case

being the home equity loan the six thing

to know is how the loan-to-value ratio

will factor in here a loan to value

ratio and lender speak as LTV right what

does this mean exactly to the rest of us

well a loan to value ratio is how much

loan you have out as a factor percentage

to the value of your home let's say that

you have a $1,000,000 home and you have

an 80 percent loan to value ratio that

would mean that you have two hundred

thousand and equity that $200,000 in the

eighty percent right over here would be

how much home loan you have on that one

million dollar house so this is what's

called an eighty percent loan to value

ratio so obviously lenders are going to

have some criteria here and depending on

what your credit score is will depend on

how much you can tap into generally

lenders are going to be looking for you

they'll at least have loan-to-value

ratio of 80% and they might only lend up

to that point leaving that 20% untied

in case why in case then use the

foreclose on you they want to make sure

they can recoup their cost so the best

way they know exactly how this is going

to work for you is to chat over your

home equity loan options with the loan

officers of your choice make sure that

you ask them these questions and make

sure that you're clear on their answers

so that you can make the best decision

possible for you the 7 thing is to

beware of the red flags there are

certain red flags that stick out that a

lender may not be the best fit for you

or may not be as reputable as some of

the other home equity loan providers

let's take a closer look at each of

these flags the first red flag is the

letter changes the terms of your loan

such as your interest rate right before

you closed under the assumption that you

won't back out because it's too late to

back out now even though in reality you

could but they're gonna make the

assumption and they're gonna try to

change something in the term this isn't

cool

and don't get the wool pulled over your

eyes the second red flag is the litter

insist of rolling on an insurance

package into your home equity loan you

can usually get your own policy of

insurance if this is required so make

sure that you're very clear on what type

of insurance it is and what type of

insurance is being provided here and see

if you really need it or if it's going

to be cheaper for you to get your own

insurance on your own here the third

thing is the lender is approving you for

payments that you really can't afford

and most importantly you know in the

bottom of your heart and your mind's eye

you know for a fact you can't afford

that payment there is a difference in

how much someone can get potentially

approved for the Bayeux home or tap into

their home equity and then the reality

of having the financial capability and

affordability to do just that afford it

please make sure that if you know you

can't repay it that you don't move

forward so don't get wooed by the

thought oh I can get $200,000 I'll be

able to just put this on the side okay

for how long let's play this out to the

next logical step here how long you can

be able to play that game before it's

gonna catch up to you let's be honest

here because we don't want you to get

hurt if you know you can't afford those

payments don't proceed with the option

please make the smart move for you the 8

thing that you want to do is to explore

the alternatives to the home equity loan

you could do a cash out refinance which

is gonna be able to give you the money

that you want but you don't have to tap

into all your home equity at one time

a cash out refinance to truly afford

repaying it back so you don't get

yourself in a bad position and lose your

house I'd hate for you they either say

Andrew I lost my house because I did

this well if you're having this

conversation with me right now that

should never be your case and as many

people as you share our conversation

with and you ask them to watch this to

if they're thinking about it guess what

we can help each other

we're always stronger and better

together than we are not let's spread

the word and inspire positivity and

dispel any negativity out there from

people making poor decisions by

education we can increase the knowledge

and the power of each of us so that we

don't fall prey to those that just want

to make a quick buck and let you run

away with the green let's be honest

there I mean it's people's internal

green their internal desire for that

money that causes these problems well we

need to make sure that we make a

balanced decisions it's your life it's

your story let's get it right because we

only get one shot and our story's gonna

take the form of the decisions that we

make each and every day the second thing

that you could do is a reverse mortgage

now a reverse mortgage specifically goes

for people that are age 62 and older now

they might want to review their options

of how a reverse mortgage is going to

work for them with a loan ah sir please

if you're considering a reverse mortgage

do your homework make sure that you

understand how that's gonna work and

what happens to you when your time comes

and you go on to the next life let's

make sure that you are setting up your

family for success living with what you

need for success and that you understand

the details of how that reverse mortgage

is going to impact you alright my

friends so now that you know more about

the home equity loan let's take a closer

look at how a home equity line of credit

works and when refinancing is a good

idea looking forward to our next

conversation well seen a few

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