A total number of points — your credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when they’re due.

When you apply for a home equity loan or second mortgage, your lender will order a credit report from each of the three national credit reporting agencies. A dispute must be submitted to each credit agency that is showing the inaccurate information. Once the problem is resolved, your lender can re-order your report to reflect the changes, and hopefully show an improved credit score.

Increasingly, people are doing this by taking out home-equity loans and lines of credit. Overall home-equity lending is up 23 percent on an annual basis, reports the Federal Deposit Insurance Corp., which keeps a close eye on factors affecting banks’ financial health.

But is all this a sign that consumers are being rash or rational?
Many lenders insist they’re not throwing caution to the wind with lax standards, and they say borrowers generally can handle the payments.

With an up-front home equity loan, you receive the full amount of the loan when it is opened, and pay it back in fixed monthly installments over the life of the loan. Your payments may be fully amortized, meaning that you pay back interest and principal as you go along, or may consist of mostly or only interest, with a “balloon” payment of the remaining money owed at the end of the loan.

Any bank with a conscience will only lend you up to 80% of the equity in your home. They send out an appraiser to get an accurate value of your house, then they determine how much equity you have in the house, and lend you up to 80% of that value. This is the safest way to do a home equity loan. You must evaluate whether an equity loan makes sense for your financial situation.

Ask all the lenders you interview to explain the loan plans they have for you. If you don’t understand any loan terms and conditions, ask questions. They could mean higher costs. Knowing just the amount of the monthly payment or the interest rate is not enough. Pay close attention to fees, including: the application or loan processing fee, origination or underwriting fee, lender or funding fee, appraisal fee, document preparation and recording fees, and broker fees which may be quoted as points, origination fees, or interest rate add-on. If points and other fees are added to your loan amount, you’ll pay more to finance them.

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This entry was posted on Friday, February 10th, 2006 under Home Equity Loans. Responses are currently closed, but you can trackback from your own site.