When emergency financial situations arise, many homeowners turn to the equity in their home for support. Homeowner loans or Home Equity loans are loans where value in a home is used as collateral for the loan application. They are a popular and convenient way to get funds in a short period of time. This makes homeowner loans a perfect tool to finance home improvements, emergency auto repairs or even as a means for debt consolidation when costly credit card debt is costing a homeowner a significant amount of monthly interest.
What Is A Homeowner Loan?
Most financial loans are backed by a collateral. This is either an asset or a fund that the loan applicant notes can be used as a security measure against the loan. That way, in the case of default, the loan originator has financial recourse and a way to recover part or all of their financial liability.
With the case of a homeowner loan, the bank considers the value of the home to be collateral. Since many people do not own their home outright, this is often the home equity i.e. the difference between what is owed on the home and the fair market value of the home. That way, homeowners can use these funds to finance improvements on the property or to pay down costly debt without having to own their home entirely.
How it Works
When the homeowner applies for the homeowner loan, sometimes an appraisal is required. However, banks will often waive this requirement for customers who have a certain loan to value ratio on their home, or who own their home outright and are not seeking a loan for a substantial amount of the home's value. The approval time for these loans is usually quick, since a homeowner loan often originates from the same bank where the mortgage is held.
Upon approval, the homeowner loan is usually given a line of credit. Since this is not like a typical loan for a home or a car, where the item for purchase is the collateral, the homeowner can use the funds in any way that they desire. In that sense, the loan often serves a purpose very similar to a low interest line of credit, to be used on demand whenever the homeowner sees fit.
Shopping for a Homeowner Loan
With housing values going in the wrong direction for a while now, it is important to have everything lined up and in the proper order when applying for a homeowner loan. Otherwise, the best rate will not be obtained. The first thing to consider when shopping for a loan is your current credit score. Since so many facets of the loan are impacted by an applicant's credit score, having the best possible score prior to applying is a good idea. This means requesting a credit report, questioning any reporting errors and paying down any extraneous debt in order to keep the credit to used credit ratio high.
Also, it is a good idea to get all of your mortgage documentation together and to try a number of banks. Simply because your mortgage lender turns an application down or offers a poor rate, that does not mean the search is over. By gathering up the relevant documentation and applying at multiple lenders, the best interest rate can be obtained.
