Owning a home is a great accomplishment in this day and age where the real estate market rises and falls at the drop of a hat. Many homeowners are finding areas in their home that could be improved or remodeled however they do not have the funds on hand to perform these renovations. Home improvement loans are personal home loans used to finance any improvements your are making to your home, whether you are installing a pool or laying out new flooring. Because property values have dropped dramatically in the past years, the need for a no equity home improvement loan has grown just as drastically. It is important for borrowers to weigh the pros and cons of no equity loans before signing on the dotted line.
A few years back, millions of homeowners tapped into the soaring value of their homes to fund remodeling projects and pay off credit card debt. Because the values of the properties seemed to increase on a daily basis, this seemed to be a great thing at the time because they were drawing against the value of their homes. However, no equity home loans are doing just the opposite. These forms of personal loans are exceeding the value of your home and are subject to high interest rates and fees, and can even put your home at risk in the event you default on the loan.
No-equity home loans are a glorified term for high loan-to-value loans where your the amount you have borrowed against your home surpasses your home’s total value. While home improvements may increase your property value, in most cases it will not increase it enough to make your loan-to-value less than the property value. This percentage that can be surpassed can be as high as 25 percent, similar to vehicle loan with negative equity carried over from a trade. These loans are a sort of hybrid secured/unsecured loan as they are secured by your home as collateral however in some instances such as bankruptcy your home is safe from foreclosure. Like many risky business loans offered both prime and sub-prime lenders, these loans are tailored to lower and middle-class homeowners who are strapped for cash. Because of today’s economy they have become a very popular choice for those who need to make improvements to their home.
Back in 1990s these types of home improvement loans arose as a great option for borrowers to take on additional debt. This high-risk lending is perhaps one of the main reasons why our real estate market is suffering today. Even after dubious lending practices in the 1990s these no-equity loans still exist from lenders such as DiTech and E-Loan.
Before you sign on to such a risky venture, you should do your research. For starters, high loan-to-value home loans are subject to extraordinarily high interest rates, running between 4 and 6 points higher than traditional home-equity loans. Aside from the exorbitant interest, there are high fees associated which seem like a trap to keep people from climbing out of the hole of endless debt. Like any other form of consumer credit, the fees and interest will depend entirely on your credit history, and the lenders willingness to lend. In most cases the high loan-to-value improvement loan will exist separately from the home mortgage, whereas the interest rate will only apply to the amount exceeding the home’s value. In other cases, the entire first mortgage will be refinanced, making the interest higher for the entire loan. It is important to see what the intentions of your lender are before proceeding.
There are many other implications associated with a no-equity home loan including tax implications and difficulty selling your home. With a high demand for these personal loans, there are definite glorified sales pitches being introduced to the uninformed consumer. Weigh the pros and cons and consider other traditional methods of obtaining a loan which may save you headache and money in the future.