The Start Of The Home Equity Loans

Written By: Jackie Smith on December 11, 2009 4 Comments

A number of years ago, banks introduced homeowners to a new product called “home equity loans”. This gave people the opportunity to cash out the value they had in their property and spend it for a variety of things. There were almost no limitations as to what you could do with the money.

It is believed that the introduction of the home equity loan is the reason for the recent recession that is happening in our country. When homeowners took out these loans some spent the funds to remodel or fix up their homes in order to increase their property value. Others used the funds to make a down payment on the purchase of a new or second home. Their were some that took out their loans to fiance the college education of their children or pay off outstanding credit card debt. Then their were those that took out these loans to buy expensive new cars, or to take extravagant vacations.

Home equity loans were available in two types. One was a straight home equity loan for a specific amount of money, usually a percentage of the value you currently had in your home. Another type was a Home Equity Line of Credit that allowed people to write checks against a credit line and then make payments according to the amount they’ve borrowed. Rates and terms varied greatly with this particular type of financing and, unfortunately, homeowners saw it as easy cash that they could access for anything they wanted at the time. Rates were often adjustable and related to the current prime rate. Anything that was not a fixed rate was particularly dangerous. Not everyone used these loans wisely.

Many wasted the funds on frivolous purchases without truly realizing that they would be paying back these funds over the life of the loan and that the interest costs would be extremely high. Home equity line rates were always higher than mortgage rates. A mortgage quote would be considerably less than a home equity line quote so, as a result, many people opted to refinance their mortgage rather than obtain a home equity loan or line of credit. Of course, the result was the same in that they no longer owned the equity in their home. This lowered the net worth of the homeowner and was only seen as beneficial if the money was used for an investment that would grow and eventually increase their net worth.

Once the economy became poor, and banks started to have financial problems, they immediately closed out all equity loans and lines or credit. Although those that already had one were safe from this, these individuals had spent all the money they were allotted. Many homeowners were furious to find out that money they had to trusted to always be there was no longer available to them, especially when they needed it the most. What I hope these individuals have come to realize is that this was a blessing in disguise to them.

In order to complete your mortgage you will need to have homeowners insurance. Once you have the insurance go to www.quotefinancial.com. They are an online mortgage service, that can obtain numerous quotes, from various companies and allow you to compare each, in order to find a suitable mortgage rate.