If you already own a home,
you've probably received many offers for home equity loans
and lines of credit:
A home equity loan is
a loan secured against your home. It is a loan in addition
to your existing mortgage.
A line of credit is also secured against your home. However,
you are not issued a check – you have access to funds
up to the limit of the line of credit.
A line of credit is,
in many ways, similar to a credit card. It is a revolving
line of credit. You can borrow money and pay it back as many
times as you need to during the term of the loan.
Although home equity can be
an excellent source of funds, you should exercise caution
when taking out a home equity loan or line of credit. Because
they are secured against your home, you could lose your home
to foreclosure if you don't make the payments on your loan.
Before you accept an offer
for a home equity loan or line of credit, make sure you know
the terms of the loan and if there are prepayment penalties.
Home equity loans are often structured as 10- or 15-year loans
– that's a long time to pay it back. If you use the funds
for a new car or a vacation, the car will need to be replaced
and your vacation memories will be long gone.
Moreover, while homes in most
markets appreciate in value over time, leaving your appreciation
intact is an excellent way of saving for college and your
retirement.
If you need to use your asset
– your home – for some important family event –
such as a medical emergency or sending a child to college
– shop around for a mortgage that is fairly priced, with
fair terms and fair marketing.
Prepayment Penalty Mortgages
Some consumers may be misinformed
about the terms of a prepayment penalty mortgage (PPM). In
order to avoid feeling trapped in a PPM, you should consider
the following information before you make a choice.
A prepayment penalty mortgage
requires that you pay a prepayment penalty or fee (a percentage
of the unpaid principal balance) if you repay your entire
loan – or a substantial portion of it – within a
certain period of time. Generally, you will be offered a lower
interest rate on your mortgage in exchange.
Prepayment penalty mortgages
have several advantages for borrowers. They include:
