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Equity Loans-More Choices
125 Home Equity Loan
One of the
variations which has broad appeal is the 125 home equity loan so
designated because the borrowers can get up to 125 % of the current
combined loan to value (CLTV). This type of loan is particularly
appealing to first time home buyers who may need to spend extra
money on furniture, home improvements, landscaping, etc. The extra
money can be used for debt consolidation, medical expenses, or
college tuition as well.
The rates and term
of the loan are usually fixed but because the extra money is
unsecured the rates are generally higher than a regular first or
second mortgage rate but still lower than credit card rates. This
type of home equity loan is good for someone planning on staying in
the house for a long time while the home appreciates. If
appreciation does not catch up or surpass the amount of the mortgage
the home owner will be "upside down" when they sell i.e. they will
owe more than the property is worth.
Reverse Mortgages
There are
additional types of home equity loans as well. Reverse mortgages
have gotten a lot of publicity lately and will probably get a lot of
press in the future as baby boomers near retirement age.
A reverse mortgage
is a home equity loan that you do not repay as long as you live in
the home. You must be at least 62 and the house must be debt free or
you must be able to pay off the debt other wise you can not
qualify.
The reason it is
called a reverse mortgage is because it is the opposite of a regular
home equity loan where you reduce debt and build up equity. In a
reverse mortgage you reduce equity and build up debt. That is where
the money comes from.
The amount you may
receive depends on a lot of factors one of which is how you receive
the money. Your age, the location of the home, interest rates, the
type of program you select, and of course the values of the home are
some of the other variables.
You may select to
get monthly payments, a lump sum upfront, or a line of credit that
would allow you to draw on the account as you needed it or a
combination of the three.
If you select a
line of credit with a "growing" credit line your available balance
earns interest. A withdrawal at the beginning of the plan could be
offset by the interest earned.
Since you still
own the home you are responsible for taxes, insurance, and upkeep.
The loan has to be repaid at the death of the owner, when it is
sold, or if you move. The proceeds from the sale of the house can be
used to pay off the loan.
It would be very
wise to have financial counsel before entering into a reverse
mortgage. They can be confusing and complicated. If you live in your
house for another 25 years it could be a great deal. If you move,
die, sell within a few years or the home appreciates at an above
average rate it may not be so good.
Depending on your
circumstances and your long term plans a reverse mortgage could have
many more positives than negatives.
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