The Home Equity Loan Process
Written by Daphne Tai, Kasey Ng   


After deciding to receive a home equity loan, the shopping process begins. When shopping for a loan, make sure to compare all the available programs offered by various lenders. Usually people check with their local banks first, and they might have a perfect loan for specific needs.


As You Begin

Do not neglect the programs offered by credit unions. Many borrowers are not aware that credit unions are easy and free to join; besides, they offer home equity loans with low fees and interest rates. In addition, spending some time and doing research online is another easy way to compare the loans from different lenders.

Negotiate!
When you shop around for lower rate of a home equity loan, it is important to negotiate for lower rates with different institutions. A lender is more likely to give you a bargain if you tell him or her that another lender is willing to give you a better rate. Make the lenders compete for your business – they are, after all, profiting from it!

Question, Question, Question!
One of the most important steps while shopping for a home equity loan is to ask questions. When people believe that they’ve found a good deal, sometimes they forget to ask questions and do not see the hidden costs or extra charges. Here are some general questions that you should ask:
  1. Will the rate change during the life of the loan? If so, when, how often, and by how much?
     
  2. Is it a large single payment at the end of the loan term after a series of low monthly payments?
     
  3. What is the penalty for late or missed payments?
     
  4. Is there a prepayment penalty?

It is crucial to pay attention to all the details and factors in the total cost of the loan rather than focusing on a single feature that appears to be attractive. Never hesitate to ask questions if you find something ambiguous or conflict with your expectations.

Prepayment
While shopping for your ideal home equity loan, also remember to talk to the lender about pre-payment options. Make sure to ask if there is a penalty for retiring the loan early and make sure that you fully understand the repayment schedule. Most people have shopped for a home equity loan, so searching for some professional helps is recommended.


Home Equity Loan Process

The Home Equity Loan process can be long and tedious, but it will be worth it! After you submit the initial application to the lender, a slew of steps follow:


Sending Documentation
To analyze your loan qualifications, you must submit documentation. Here are a few examples of items you will be required to provide:
  • Appraisal Authorization Form?
  • Information Access Authorization Forms
  • Bank Statements
  • Financial Analysis Worksheet
  • Mortgage Statement
  • Note for First Mortgage
  • Proof of Homeowners Insurance
  • W-2 Statements: an annual summary of your wages and taxes
    • If you are salaried: provide two years W-2 and one month of paystubs
    • If you are self-employed: provide two years tax returns and a YTD profit and loss statement.
  • Copy of green card if not a U.S. citizen
  • H-1 or L-1 visa if not a permanent resident?

Scheduling the Signing of Your Document
After your loan is approved, you will be required to sign the final loan documents.?Make sure to thoroughy review the final loan documents to ensure that the interest rate and loan terms are what you were promised. Also verify that the name and address on the loan documents are accurate before you sign the loan documents.


After the Signing
You will receive the documents funding for your loan. Remember, under the Truth in Lending Act, on home equity loan transactions, borrowers have 3 days to review the documents before their loan transaction can close. Thus, you have a 3 day grace period to make sure that everything is as promised and that you are satisfied.


Things to Remember When Getting a Home Equity Loan
  • A home equity loan allows homeowners to borrow money by leveraging the equity in their homes. If you default, you could lose your home, which is your biggest asset.
     
  • In many cases, borrowers can deduct the interest on loans up to $100,000 on their taxes. For the detail of tax deduction, read our article on what is a home-equity loan and why do people need it? Also see our Tax Deductibility page for general mortgage tax deductions.
     
  • The home equity loans carry lower interest rates than credit cards or unsecured loans.
     
  • This type of loan could be risky for people who are retiring and not having a stable income.
     
  • If your home’s value drops, you might end up owing more than the house is worth.
Last Updated on Wednesday, 22 December 2010 05:49