Can a HELOC Help Pay Off Existing Debt Quicker?

With the current economy many people are asking the question, can a HELOC pay off existing debt quicker? Well, the answer to that question is not an easy one for many reasons. There are many things to consider when you are thinking about a home equity line of credit.
If all things are be looked at on a level playing field, I would have to answer the question as “yes.” But rarely is the playing field in our lives level. So there are other things you have to consider when you are looking for ways to pay off debt, especially if it is unsecured debt (credit card debt).
Let’s look at paying off debt with a home equity loan. First of all, this is a loan and will require you to be credit worthy. But most important of all the loan will be secured with your home. If you default on this loan, you are putting yourself in a position to have your home foreclosed on. There are other options that will help you get out of debt without putting your home at risk. I will get into those in a minute.
If you do opt for a home equity line of credit, you will most likely get an interest rate that is considerably less than the interest rate on most credit cards. Also, you will be able to deduct the interest paid on this loan on your taxes. You must also understand that more than 70 percent of all people that pay off unsecured debt with home equity loans have credit card debt again within a year. This leaves you with both a loan payment and credit card payments to make each month.
A home equity loan is not your only option for paying off credit card debt and personally, they are not something I would recommend to someone that has debt. Two better options are consumer credit counseling and a self-managed debt elimination plan. One of the best guides for getting out of debt is Larry Winget’s book, “You are broke because you want to be.” This guide tells you step-by-step how to set up a budget and manage your finances so that you can pay off your debt.
Consumer credit counseling is another option for paying off debt. This works best for individuals that struggle with being disciplined with managing money. Credit counselors will works with your creditors and consolidate your debts without another loan. You will make one monthly payment to the counseling agency and they will distribute it to your lenders. Your fees will be eliminated and your interest rates reduced. Your credit card accounts will be closed and you will not be allowed to open new ones until, you have completed your debt management plan. Most plans last no longer than five years.

Interest Rate Manipulations and the Governments Role in the Foreclosure Crisis

With the possibility of an economy-wide recession becoming clearer every day, and the realization by more and more homeowners that they are experiencing their own personal recession, the outlook for the housing market looks even dimmer than it did even a few months ago. So-called experts can be seen recommending that people spend money and buy to prop up the economy, but an attitude of instant gratification and overspending by both consumers and the government have led us to this economic situation. The problem of overspending should not be met with the solution of more spending.

Actually, spending too much money is exactly what caused some of these problems in the economy. During the real estate boom of the early 2000′s, when interest rates were manipulated downwards to provide economic stimulus after the tech bubble and 9/11, home buyers went out and spent as much as they could getting a home. With the artificially low interest rates, lenders gave every loan applicant as much as possible, believing the rising prices in the real estate market would take care of any potential foreclosure problems. Then the homeowners kept right on spending with their credit cards and HELOCs until they had all the cars, computers, and other consumer goods that they wanted.

But spending on credit means that, eventually, the bills will come due, and homeowners found that out the hard way when their subprime ARM mortgage rates increased. Then, in order to keep the mortgage on time, they had to miss a payment on this credit card or that personal loan, which drove up the interest rates on these loans. When a payment is missed, credit cards often drastically raise the interest rate, doubling or tripling the original, in some cases. Interest rates of less than 10% skyrocketed to 29.99% after a missed payment, and then the homeowners had to decide between paying the mortgage at all or paying the credit cards. In the meantime, collectors from all companies were calling several times every day looking for their money.

Factor in inflation due to government overspending and devaluation of the currency, and prices for transportation, home heating, and food were going up 10% or more per year. For homeowners who did not have to drive to work, heat their home, use electricity, or buy food to feed their families, the financial situation remained stable. For the rest, higher expenses translated into a decrease in the amount of income the homeowners could use for savings, paying down debt, or maintaining their current standard of living.

Thus, homeowners spent their way from a 6% mortgage rate to an 11% rate, and from a 10% credit card rate to a 29.99% rate. And in turn, the government also spent the homeowners’ way from the dollar being the reserve currency of the world to a tripling of oil prices and inflation rates of 30% in some commodities. After all, the government really does not have anything, except what they take from consumers in the form of taxation or inflation, or borrow from other sources.

And what about the savings that homeowners should have been putting away to meet any emergency? Well, that was nonexistent, as the savings rate in America has been negative for years now. Consumers spent so much, that they had to borrow even more money just to make ends meet and continue their spending. Of course, now, instead of borrowing for unnecessary items, they are spending borrowed money just to make their increasing payments on the mortgage and credit cards, while borrowing even more to spend for basic items like food and gas.

Government interest rate manipulation and inflation are the two main reasons for the crisis being experienced now. And the solutions that have been offered so far are simply more rate manipulations and inflation! This is like a doctor giving a patient a medication he is violently allergic to, and then prescribing more of the same medication to combat the additional illnesses caused by the medication in the first place. At some point, either the treatment will need to be changed, or the patient will die. For now, though, if we could get spending under control, and consumers saved even a little bit to get through financial hardships, the fear of recession would probably be much less, and the economic downturn itself would be less dramatic.

How Does a Fed Cut Affect Home Mortgage Rates?

Maybe you’ve been considering a refinance, and you’re waiting to move forward till the Fed takes action again. But be smart about waiting and watching. A Fed cut doesn’t directly affect long term rates (for instance a 30 year fixed mortgage), but it does impact long term mortgage rates. The problem is the impact might not have the result you’ve been waiting for.
Who is the Fed? Well, it’s really the Federal Reserve. And when the Fed cuts rates, it usually cuts the Fed Funds Rate, which is the rate banks lend each other money. However, when the Fed lowers the Fed Funds Rate, Prime Rate, the rate banks give their best customers, usually drops as well. Ok, that’s great. But what does that really mean to the average person on the street? It means that anything that has an interest rate tied to Prime is directly affected by the Feds’ rate cut. Typically, these are short term loans. For instance: a credit card or a Home Equity Line of Credit (HELOC). In general, these rates decline when the Fed lowers rates. On the flip side, a Fed rate cut means your savings will perhaps not yield as much interest and your CD (certificate of deposit) won’t be at such a great rate. So, it’s not all good.
Why aren’t mortgages directly affected? Because mortgage rates are typically longer term rates and are influenced by buyers and sellers in the bond market. Daily movements in the bond market cause mortgage rates to change. That’s why you might get a quote from a loan officer on Tuesday, and on Wednesday, your quoted interest rate has increased .125%. The Fed lowers rates to help stimulate the economy. Ultimately a healthy economy is good for the real estate market. Jesse Lehn, Senior Vice President for Mortgage Investors Group, believes,

How to Get a Low Rate Second Mortgage

You can improve your chances of qualifying for a low rate second mortgage by following a few simple steps. Before you apply for a loan, you should ensure that your credit history is clean, confirm you have enough equity to qualify, and determine which second mortgage is the best option for your needs and financial situation. Next you can shop for a low rate second mortgage lender and compare offers. With preparation, you may be able to close on your second home loan in as little as two weeks.

Confirm Your Credit History Is Clean

Even though you already own your home, prospective lenders will check your credit history to verify that you’re paying your current loan on time, haven’t recently taken on any large debts, and haven’t recently been delinquent on any debts or filed for bankruptcy.

Before applying for a low rate second mortgage, check your credit reports to make sure they don’t list any errors. If you have legitimate recent black marks, do what you can to correct them. Recent dings on your credit can result in a higher rate home equity loan. You should also check your credit score to see what rate you’re likely to qualify for.

Confirm Your Current Mortgage Balance and Home Value

When deciding how much money to borrow, you should first confirm that you and your primary lender agree on how much you still owe. If your numbers don’t match the banks, make sure all your payments have been processed properly.

You can use a variety of real estate websites to assess your home’s current market value. It may not be as much as you think if the market is on a downswing. A lower market value will limit the amount you can borrow against your equity. The combined balance of your first and second mortgages should never be more than 80% of your home’s value.

Determine Which Second Mortgage Option is Best

Before applying for a loan; decide what you plan to use the money for. Total up all the expected costs and add a little extra to cover unanticipated costs if you’re using the money for remodeling or college tuition, but not so much that you’re tempted to use the money for unrelated purchases. Remember that you are risking your home, so borrow wisely. Only borrow an amount you can afford to repay and only for items that will directly improve your home’s resale value, your financial situation, or your child’s or your future earning potential.

Once you’ve decided how much to borrow, you can decide whether a home equity loan

Or home equity line of credit is a better choice. A home equity loan lets you borrow a single lump sum and pay it back over time at a fixed rate. A home equity line of credit (HELOC) allows you to borrow smaller amounts when you need them and then pay them back over a period of time at a variable interest rate. If you’re consolidating debt or embarking on a small home remodeling project that will be completed quickly, then a lump-sum loan is preferable. If your remodeling project will take several months or you’ll need periodic college tuition payments, then a HELOC is a better choice.

Choose a Low Rate Second Mortgage Lender

Don’t automatically accept a loan from the first lender you find. Instead shop around on the Internet to determine what kind of second mortgage rate you can expect. You should approach two to three reputable lenders for estimates of your APR, fees, and other costs. When choosing your lender, compare all those factors and decide which is best. Once you’ve selected a lender and begun the application process, your preliminary work should help the process go smoothly and quickly.

For more articles and suggestions, visit http://www.bills.com/low-rate-second-mortgage/

Lowering as Much as Possible a Home Equity Loan Rate

Comparing rates from different lending sources is known to be amongst consumers, the preferred way to find the best rate for a home equity loan. By obtaining multiple offers, you have good chances of getting a decent rate; there are several actions you can take to help you get the lowest rate possible.

Doing your Best to Obtain Prime Rates

Being labeled as bad credit can be frustrating and cost expensive in times when cash advance is needed. Therefore, if you have the time to improve your credit ratings prior applying for a Home Equity Loan, do so.

If you have been labeled as bad credit because of one specific credit problem but usually your credit score is good and always make payments on time, let the lender know about it. Writing a letter and explaining the situation will help, if you can provide pass bank statements showing you are in good standards will add some positive judgment to the decision.

By applying for a shorter repayment plan you will lower the quoted interest rate. Make sure to compare several market lenders as well as other financial institutions and banks. This action will help you find the best deal available and don’t be shy to negotiate the rates, terms and fees, everyone does so!

Considering Other Factors That Contribute To the Total Cost of the Loan

Although the interest rates happen to be very important when obtaining a HELOC or Home Equity Loan, they aren’t the only factors. Some lenders offer great interest rates, but, very high fees. Try To make sure that the total cost will not be too expensive. Choose an equity lender after comparing several options from various lenders.

How the Prime Rate Works

If you are shopping for a new credit card, an education loan, a car loan, a business loan, a personal loan or a specific type of second mortgage called a home equity line of credit (HELOC) then you need to understand how the U.S. Prime Rate works.

On Wall Street and throughout the worldwide banking community, the U.S. Prime Rate is understood as the interest rate at which banks lend money to their most creditworthy business customers. Most American banks, credit unions and other lending institutions use the U.S. Prime Rate as an index or base rate for numerous loan products; a margin is added to the Prime Rate depending on how risky the lending institution feels the loan is: the riskier the loan, the higher the margin. However, since the Prime Rate is an index and not a law, business owners and consumers can sometimes find loan products that have an interest rate that’s below the U.S. Prime Rate.

The U.S. Prime Rate is determined by adding 300 basis points (3.00 percentage points) to the federal funds target rate (also known as the fed funds target rate.) So if the fed funds target rate is 5.25%, then the U.S. Prime rate will be 8.25%.

The federal funds target rate is America’s most important short-term interest rate, and it is controlled by a group within the U.S. Federal Reserve system called the Federal Open Market Committee (FOMC). The FOMC convenes a monetary policy meeting eight times every year to decide whether to raise, lower or make no changes to the fed funds target rate. The FOMC may also hold an emergency meeting at any time, if economic conditions warrant.

If the FOMC determines that the pace of inflation within the U.S. economy is too high, then the group is more likely to raise the fed funds target rate, so as to bring inflation under control. Conversely, if the FOMC determines that numerous sectors of the U.S. economy are flagging in a significant way, or if the economy is determined to be in recession, then the group is more likely to lower the fed funds target rate, so as to spur economic growth. If the U.S. economy is growing at a moderate pace and inflation is also rising at a moderate rate, then the FOMC is more likely to make no changes to the fed funds target rate.

When it comes to borrowing money, timing is very crucial, so it’s important for consumers and business owners to stay informed about what the FOMC is likely to do with the fed funds target rate at the FOMC’s next monetary policy meeting. If the U.S. economy is showing clear signs of contraction, then holding off on a fixed-rate loan may be a good idea, since in such an economic environment, short-term interest rates, like the Prime Rate, may be on their way down. On the other hand, if the U.S. economy is growing at a very strong pace and the rate of inflation is relatively high, then borrowing via a fixed-rate loan sooner rather than later may be the smarter option, because in such an economic environment, short-term interest rates may be on their way up.

Variable Interest Rates and HELOC

In most instances, your HELOC Equity credit facility will feature a variable interest rate. This is very much akin to how your credit cards operate. Typically, a specific number of points (as in interest rate percentages) is added to the prevailing prime interest rate. If you have an outstanding credit score then your HELOC may feature the prime borrowing rate, which is usually tied to movements in popular credit indexes such as US Treasury Bonds or LIBOR (or the London Interbank Offering Rate). As these indexes fluctuate, so does the amount of interest that is due on the outstanding principal balance that you have drawn from your HELOC.

 

However, in order to ensure that during times of inflation, most HELOC agreements feature maximum interest rates. The same generally holds true of variable interest rate mortgages. If the interest rates associated with your HELOC begins to rise rapidly as a function of major changes in the credit markets then it is advisable that you repay as much of the credit facility as you can. This will substantially lower your payments. As we have discussed before, one of the primary concerns among central banks throughout the world was that interest rates would rise sharply as a result of the credit crisis, lack of securitization market, and the downward spiral of housing prices. However, central bankers have poured money into the financial system so that the prime interest rates remain at historical lows.

 

On a side note, the reason why interest rates vary is because money