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Home equity loans in Financial Aid packages

Home Equity Loans in Financial Aid Packages
By Financial writer Victor Alvarez

An unfortunate reality is Federal financial aid has not grown in par with rising costs and fees of attending college. Gallup reports Families Digging Deeper to Invest in Rising Cost of College* – In 2009-2010 our own blind study showed 18 percent** of parents utilized home equity loans or HELOC (Home Equity Line Of Credit) to help complete their child’s Financial Aid package. *National Study from Sallie Mae, Gallup can be found at CBS MarketWatch here.
**HomeEquityLoans.org blind study of 200 U.S. Families in Los Angeles County June-July 2010.

The first thing for parents (of colleges students) to know is that home equity loans are not the first option to consider to complete a financial aid package.

Learn by reviewing the following:

1. Obtain as much free Federal aid, grants, fellowships and scholarships before turning to any non-federal loan. That being said, an important date to mark in your calendar, or put on the refrigerator, is January 1st of each year. Why is this date important? This is the first day to submit the FAFSA, which stands for Free Application for Federal Student Aid.

Resources to visit:
The FAFSA is available at http://fafsa.ed.gov
Find Direct PLUS loans at ED.gov PLUS Page here.
Student may borrow federal direct loans at http://www.studentloans.gov

2. Learn more about home equity loans and HELOC

Home equity is essentially the difference between the appraised value of your home and the total mortgage that you still owe on your home. This means that if you have an appraised value of $20,000 on your home and you still owe about $5,000 on it, your home equity is about $15,000. The higher your home equity amount the better, because this can also be a measure of your net worth and credit score. Helpful resource for credit scores: http://freescore.com

When someone applies for a home equity loan, they are basically taking on a second mortgage on their home. A home equity loan is given to a person in bulk and they will have to pay interest on it based on the entire principal amount, which is the amount of the home equity that a person has. On the other hand, a home equity line of credit has the basic characteristics of a loan, except that the disbursement of the amount being loaned is given to the borrower according to his need for the money. Instead of in bulk, he is given a credit line which he can withdraw money on if the need arises.

Since many home equity loans and lines of credit are secured by home equity, the interest rates of these loans tend to be lower and also tend to be fixed. The best thing about home equity loans is that if you own your home and you have a bad credit score, you will still be able to avail of a home equity loan or line of credit since your house is used as collateral. There are also many cases that when a borrowers takes out a home equity loan, the payments that he makes to the loan are actually tax deductible, which makes this kind of home loan very attractive to parents who are seeking as many tax savings options as possible to assist in federal aid qualification.

With home equity loans, since the loan is put against home equity, the higher the home equity that you have the higher your loan amount can be. These types of loans are very ideal for big projects or expenses you may incur in your life such as adding improvement to your house, renovating your home, consolidating existing debts that all have high interest, financing other real property, or investing in another person’s education. If you notice, many of these reasons for the home loans are ideal for adding to a person’s net worth. Buying depreciating goods, like automobiles, is probably not a very good investment choice for any borrower who takes on an equity loan.

This is why it is very important that a potential home loan borrower think twice before putting up his home equity towards a loan that he might not even need. It is best to not make a loan at all since your home is used as collateral. This means that during the whole loan repayment period, you are constantly at risk of losing your house if you become delinquent on payments. It may be best to research your other options before making a final decision to borrow against your own home’s equity.

Another Resource to learn about HELOC: http://en.wikipedia.org/wiki/Home_equity_line_of_credit

3. Choosing A Home Equity Loan That Works for Your individual needs

If you decide to take out a home equity loan for college, by using your own home as collateral, then there are several things you should consider before you take that big step. A home equity loan is like taking on a second mortgage on your house. It will require for you to look at your own financial standing and ask yourself if you are ready to take on a second mortgage and pay the loan promptly without any difficulty. The worse thing to do when deciding on a home equity loan is jumping into it blindly. This is why you will need to undertake the proper research and do the required calculations to make the final decision.

First, it is always best to look around and find out what kinds of home equity loans and home equity loan rates are available in the market today. Different banks will have different interest rates, and different credit unions and brokers will offer a variety of terms that may seem attractive. Pick the top ones that interest you and lay them out on a matrix. This will definitely help you decide which ones will give you the best advantages when you do decide to sign up for a home equity loan.

Second, get a copy of your credit score and make sure you know why your credit score is the way it is today. If you want a lower interest rate, you may have to make sure you have a great credit score rating to be able to avail of the interest rate you want. Pay your bills on time and your credit score rating will definitely go up. Getting rid of other debts quickly is another way to clean up your credit score. If you find any discrepancies on your credit score report, then report it immediately so that they can fix it quickly. If you don’t fix obvious mistakes in your credit score today, it will affect all transactions in the future that require referring back to your credit score.

Third, make a budget. Once you have the researched all the credit unions’ and banks’ different loaning programs on home equity, you can basically make a simple budget that will cover your monthly and annual income and the payments that you will expect to incur when you make the repayment of the loans. By having a simple budget you will be given a good idea about whether or not you can afford to have a second mortgage on your home. Without a budget, you will be making a decision blindly and will end up more in debt than you can handle.

Lastly, find out all the necessary requirements that each lending firm has on home equity loans. This may include insurance on your home as well as insurance on yourself. Be sure that you factor these into your budget as well so that you are not surprised once you get a bill for insurance that you forgot you signed up for just to get the loan. By being prepared with all this research, you can be sure to make a smart decision in choosing the best home equity loan for you!

Think Local when borrowing. Helpful resource: http://creditunionsonline.com

4. Picking the Best Features in an Equity Loan Plan

When you are considering getting a home equity loan, it is best to weigh all your options before making a final decision to sign a home loan agreement. This means that you have to be able to point out all the best features that a loan has which the lender will offer. These best features should always work to your advantage and allow you to benefit from it in the long run. Here are some features that you should watch out for when picking a home equity loan that best fits your needs:

Home equity loan rate – this is basically the interest rate that will be charged to your principal loan amount. The principal loan amount is based on the amount of your home equity. Always make sure that the interest rate that you get is low and is fixed. If you get a home equity line of credit, chances are the interest rate will be variable and will change annually depending on how the lending company fares in the overall economy. A big disadvantage of a home equity loan is that the interest rate is generally fixed and will help the borrower have better management over his finances in the long term.

Switch from variable to fixed interest rates – if your home equity loan is based on a variable interest rate, it is best to talk to the bank or lender and find out if there are options where you can switch over to a fixed interest rate after a year or so into your loan. It is in your best interest to get a fixed interest so that your payments stay stable no matter how unstable the economy gets. Variable rates can fluctuate a lot and this will only cause your monthly payments to either get very low, or reach extremely high limits.

Cap on interest rate – This applies mainly to those who avail of a home equity loan with a variable interest rate. When you have a variable interest rate, make sure you talk to your lender or bank and ensure that there is a cap on the interest rates that they charge their borrower. Having a cap on the interest rates will help borrowers not become victims to skyrocketing interest rates in case the economy doesn’t do so well in the future. This means that there will be a limit to the amount of interest that they will be able to charge you annually no matter how badly their company performs.

No pre-payment penalties – there may be a time in your life, after you avail of your home equity loan, that you may want to settle the whole principal amount before it incurs any more interest. Before you sign up for the loan, make sure that the lender you have doesn’t charge any penalties to borrowers who opt to pay the full principal payment before the due date. To be safe, a borrower should ask a bank or lender to recalculate the loan amount that is remaining, with the applied interest rate as of the day they want to settle the whole debt. This way the borrower won’t suffer from interest rates he doesn’t expect and the bank will be clear that the account is settle and close out the loan properly.

Try our own home equity loan calculator at: http://www.homeequityloans.org/homeequityloancalculator.html

5. Alternative education loans instead on home equity loans?

An Alternative Student Loan Can Help You pay for Education, but at a cost. In many cases alternative, or private loans carry higher interest rates than home equity loans
The Alternative Student Loan has been created specifically in order to provide funds for tuition and additional expenses that the college student hasn’t been able to secure funding for. This loan type should be considered only after students (and parents) have exhausted all the other avenues of acquiring aid, ex. Scholarships, grants, Federal student loans and home equity loans (in a cases by case basis). Non Federal loans fill the gap between Awarded Federal Aid and the actual cost of college fees, which has skyrocketed, unfortunately not in keeping with the rise in Federal Loans. Since the Federal Loans fall short of covering all costs, which the student incurs in college today, they are forced to look for alternative avenues to cover the short fall.

What can it be used for?
Anything that is education-related.
Books
Computers
Tuition
Room and board
Transportation
Study abroad
Materials and supplies

What are the Loan Repayment Options?
You can choose to Defer Payment, or to pay only Interest, or pay Interest and Principal; depending on your private loan lender.

Defer Payment: While you are enrolled in college, you will not make any Principal or Interest payments. This will start 6 months after you graduate, or after you are no longer enrolled at least half time. This is an attractive benefit and as a result of this, many college students opt for the Alternative Student Loan.

Pay only Interest: You can choose to pay only the accrued interest while in college, and pay Interest and Principal 45 days after you graduate.

Pay Interest and Principal: You can choose to make immediate repayment of both Interest and Principal which will need to be paid 45 days after the money has been disbursed to you.

What is the Procedure and how long does it take to get an Alternative, or private, student Loan?
You will receive a list of documents to submit so that they can verify the information you provided on your application form. After you submit these documents, you may receive a conditional approval. Once the verification procedure is over, it may take a few weeks for the checks to be sent to your college.

An Alternative Student Loan is Credit-based and in order to get approved it is necessary that you have an established positive score and a cosigner. If both these are in order, it will increase your chances of getting the loan approved quickly.

What is the Interest Rate?
The interest rate of an Alternative Student loan varies from time to time and is a combination of the Prime or LIBOR rate (the Index rate) plus or minus a margin. This will fluctuate as the Index rate changes.

With the economic crises that the country faces today and the instability in the financial markets, most banks are averse to giving private loans to college students. This is also due to the increasing number of defaulters among them. As the situations continue to worsen, students will find that the loans are sparsely available or that the interest rates are very high.

Phone numbers for national banks and lenders providing alternative/private education loans:
Citi 1-800-788-3368
Discover 1-877-728-3030
Wells Fargo 1-800-658-3567
CHASE 1-800-487-4404

Remember Many families with high credit scores (740+) are utilizing home equity loan as a tool to supplement and complete the student’s total Financial Aid Package, and avoid hist cost private and alternative college loans which often burden students with debt and stress when these alternative loans come due.

Learn more about home equity and find active lenders at www.homeequityloans.org

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