The American Education Institute

FREE UP CAPITAL WITH A HOME EQUITY LOAN.

Similar to the previous method, this way to obtain 100% financing also utilizes the equity you have accumulated in your own home or in other investment properties that you have already purchased.  Many traditional lending institutions will make loans that are secured by your home’s or another owned property’s equity up to 75% of their fair market value.  Sometimes you may even be able to make a loan up to 80% or 85% of the collateral property’s FMV.  If you can acquire such a loan,   you’ll be able to buy yet another property in the traditionally mortgaged way.

You should be aware that the interest rate on this type of loan (often referred to as a home equity loan) is generally tied to the “prime rate” which amounts to the lowest rate which most banks will extend to their very best corporate borrowers.  Sometimes banks define this in terms of what some major New York City bank (such as Chase Manhattan) has decided should be their ” prime rate,” because that is how they’ll translate the interest rate which they intend to charge you.  Some banks and other mortgage lenders might say they offer home equity loans at the prime rate or even one-half percent below prime, while others will say their rates are “only” 2% to 4% above prime.  You might also be given a better rate depending on the amount you borrow.  Usually the greater the loan, the lesser the rate.

You also need to be aware of “fixed” versus “variable rate” APRs (annual percentage rates).  The difference between such terms as “effective annual yield” and “actual cost of financing” are more technical than you need to be concerned with here, but you should at lease recognize that a fixed loan has an interest rate that never changes throughout the life (term) of the loan, and a variable rate loan has an interest rate that may indeed change according to some criteria which the lender decides should be used.

For example, if the variable rate is tied to the prime rate, your lender might specify that the home equity loan rate will change whenever the prime rate changes, or at four or six month intervals, or according to some other plan or schedule.  For the most part, you’re better off sticking with a fixed interest rate loan, although in times of economic prosperity you can make out with a variable rate when the prime rate in fact goes down, which can sometimes happen.  You might, for example, start out making payments calculated on an interest rate of 10% which steadily decreases along with the prime rate until you end up paying back a loan based on a 7% interest rate.

Some aspects of home equity loans that may work to your advantage include the variable terms of payback that may be offered, depending on the lender, and the fact that the interest rate on the home equity loans may be tax deductible.  The term, or life, of most such loans can vary between five and 15 years.  Most home equity lenders do not change “points” (each point equals one percent of the amount of the loan) which a borrower sometimes must pay as a fee to the institution for making the loan.  Another type of fee, called “loan origination costs,” might possibly be charged for a home equity loan, but this fee is usually quite small.

You can begin to see why negotiating with a seller for financing is always better and easier than negotiating with a bank.  But when the bank is your only hope, it’s nice to know that you can at least take out a loan based on the equity in your very own home.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 12-18-09