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The 411 on Secured Loans: What you need to know
Any time someone borrows money from a bank, the funds lent are referred to as a loan. Any time when the bank asks for collateral (a security that the bank takes charge of if you are unable to pay, like your home or property), thats called a secure loan. A first secured loan on property is considered to be first charge, while a second loan (perhaps a home equity or second mortgage) is second charge. Secured loans are easier to obtain than an unsecured loan, as the bank has a means of repayment in the event that you are unable to.
There are many types of secured loan programs available, offering different benefits and such to the borrower. But no matter which one you choose, there are some things you need to know before you agree to or sign anything.
First, secured loans come in a variety of amounts (typically averaging between £3,000 to £50,000, but have been seen as high as £250,000 with some lenders). They are repaid on a monthly basis for a predetermined amount of time (usually between 3 and 25 years). Some loan programs may have a prepayment penalty (a fee attached to the loan if it is paid off earlier than expected), so be sure to ask your lender if this applies to your loan.
Second, the APR (Annual Percentage Rate) is the interest youll be charged for borrowing the money. Your APR will depend on several factors, including your credit history and equity available in the property. Its a wise idea to compare interest rates from different lenders to be sure that youre getting the best one possible.
Next, you need to know how to apply for a secured loan. The Internet revolution has changed the lending industry for the better, as its no longer necessary for you to leave your home to apply for a secure loan. Although you can visit your local branch of your favorite lending institution, its much easier to login online and enter your information, or to pick up the telephone.
Finally, you need to know how governing laws are protecting you. All secured homeowner loans are subject to the Consumer Credit Act of 1974. This act contains strict guidelines as to how money is lent out, covering loans up to £25,000. (Loans for greater amounts are unregulated). Before such a secured loan is granted, you will have to sign a legally binding credit agreement for the terms of your particular program. A consideration period of 7 days is to be granted to you by the lender. Lenders are to offer you insurance options to cover your monthly loan payments in the event that you are unable to pay under specific circumstances, such as illness, unemployment, an accident or death. All coverage options will vary between lenders, and so will the cost, so be sure to check with your lender for any details, specifically as to what is covered and what is not.
Top 5 mistakes when getting home equity
Rates have historically never been better, so nowadays the temptation to borrow against your home equity is very strong. However, many homeowners unknowingly make costly mistakes.
Here are the top 5 mistakes people make when applying for a home equity loan.
Mistake 1 – Not Knowing The Difference between a Home Equity Loan and a Home Equity Line of Credit
A home equity loan is a one-time transaction that allows you to draw out all the funds available.
A home equity line of credit (HELOC) is open; you can choose a small initial advance against the full amount of the line; then reuse the line of credit as often as you want during the period that the line is open. Your monthly payment is based on the outstanding balance.
A general rule of thumb is: use a home equity loan when you need all the money up front; such as cash for home improvements, debt consolidation, or a large one-time purchase.
If you need ongoing access to cash and revolving credit a HELOC may be your best choice.
Mistake 2 – Taking a Home Equity Loan When You Plan on Refinancing Your First Mortgage
Many mortgage companies look at the combined loan amounts (i.e., the sum of the first and second loans) even when you are refinancing only your first loan. If you plan on refinancing your first loan the lender may require you to pay off both your first and second mortgages; or close your home equity line completely.
Check with your mortgage company to see if having a second loan will cause your refinance to be turned down.
Mistake 3 – Not Knowing The Hidden Costs
If you feel you must take out a home equity loan or open a line of credit it is important to know ALL the costs. With any loan secured against your property there can be hefty insurance costs, appraisals and other fees that can cut into your loan amount.
Mistake 4 – Only Applying at Your Current Bank
Many consumers apply for their home equity loan from their home bank. This can be a costly mistake.
As in any other type of loan, be sure to shop around for the best deal. Your current bank may not be able to give you the best interest rate or the best terms.
Think twice before deciding to use your local bank; you may find that there is another lender out there that can offer you a substantially more attractive loan program.
Mistake 5 – Not Checking Your Credit First
As in any type of loan, it is imperative that you get the best rates and terms. However, if you have credit problems it will seriously affect your ability to qualify.
In fact, if your credit is not the greatest you may have no choice but to use alternative lenders specializing in hard to place loans. The solution: Make sure you go with the bank or lender that provides the best rates for your type of credit whether good or bad.
There you have it. Avoid these 5 mistakes and you could save yourself hundreds, if not thousands of dollars when you get a home equity loan.
Strategic Capital Network is a licensed mortgage brokerage specializing in helping credit challenged homeowners qualify for home equity loans.