Money Advice Guide

The Federal Reserve Rate Effects

The Federal Reserve interest rate is the rate at which the banks borrow amongst themselves as well as from the Federal Reserve. The interest rates keep fluctuating for many reasons. When the Federal funds rate gets reduced, it leads to a lot of borrowing and spending. This leads to an adverse effect on home equity loans and mortgage loans. The lower Federal Reserve interest rates have an effect on the home equity loan because it is a long-term loan with a long-term rate.

The Federal Fund rate, the rate at which the banks borrow amongst themselves, is a short-term rate; when this rate falls, the borrowing and expenditure increases, and this gives rise to a situation of inflation. Long-term rates, like the mortgage rates, which are for up to 30 years, are very sensitive to the speculations about inflation. In a response, there is a very high possibility of an increase in home equity loan rates.

Loan Offers

Lenders, generally, give good deals at this time. What is required, is to understand and compare the different rates and offers by the multiple lenders. The interest rates are negotiable, which means that it is possible to save lots of money on home equity loans by bargaining a little with the lenders.

Markets have an edge over the Federal Reserve, as the interest rates get determined in the active public markets everyday. The markets anticipate the economic factors very fast and grasp that if the economy is slow, then the short-term interest rates offered by the Federal Reserve will get lowered. This happened in the year 2000, when the mortgage rates fell even when the short-term rates offered by the Federal Reserve were the same. A possibility of increase in the mortgage loans with a rise in the short-term rates cannot be negated.

The reasons for an increase in the borrowing of home equity loans are the tax deductions. The interest rate is lower in comparison to the rates on a credit card because it is a long-term loan. The tax deductions are valid if the loan is not of a very huge amount. The repayment terms in home equity loans are very flexible and are spread out on a long term. That means that anyone who owns a home is entitled to it.

The Solution Is Competition

The line of credit offered by some lenders to the quality borrowers is at times with no closing costs and no fees. At any place where there are many lenders; there are better offers and opportunities for the borrowers. It’s heaven for the borrowers where there is a huge competition within the lenders. There are lots of financial institutions, like banks, trying to cater to the borrowers with lucrative interest rates that are just one point over the prime rate with additional rebates on closing costs depending upon the borrowed amount through the year.

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If you are like most Americans you’ve probably racked up considerable debt trying to keep up with the Smith and Jones families down the street. According to Cardweb.com, the leading online publisher of information pertaining to credit and other payment cards, you are not alone. In 2004, individuals who earned between $75,000 and $100,000 per year, and had at least one credit card, carried an average revolving balance of nearly $8,000. This does not even include other personal debts such as car loans, which can total in the tens of thousands.

If credit card debt is keeping you up at night, you’re probably wondering what you can or should do about it. File for bankruptcy? Refinance? If you refinance, is a fixed mortgage rate or an adjustable rate mortgage better? What about a home equity loan? The simplest answer of course is to get a debt consolidation loan.

What is a Debt Consolidation Loan?

Simply put, a debt consolidation loan lumps all of your debts together and pays them off using a single new loan. The next question of course is how to go about getting a debt consolidation loan. Visit a loan shark? Take out a second mortgage on your home? Apply for an unsecured loan at the bank and hope for the best? For the majority of folks a visit to the local loan shark is not a viable option; but taking out a 2nd mortgage or obtaining an unsecured loan from the bank are both excellent choices.

Whether you use a second mortgage or an unsecured loan to pay off credit card debt, often depends on several important factors including whether you actually own a home, what your credit rating is, and what the total dollar amount of the credit card debt is that you owe to various financial institutions. According to one expert we spoke to who used to work in the unsecured loan business but now runs his own mortgage broker business, “The most important consideration is the borrowers credit history.”

2nd Mortgage

A second mortgage is a loan or mortgage that is taken out after a first mortgage. It is similar to a first mortgage in that it uses the equity built up in a home as collateral. Similar to a first mortgage, a second mortgage consists of a fixed dollar amount that is paid out in one lump sum and repaid over a period of time typically 15 or 30 years. A 2nd mortgage may be either a fixed rate or an adjustable rate mortgage.

Sometimes called a junior mortgage or junior lien, a 2nd mortgage is subordinate to a 1st or primary mortgage. What this means is that in the case of default, the lender for the first mortgage gets paid before the lender who issued the second mortgage does. As such, a 2nd mortgage is considered to be a higher risk and lenders often charge a higher interest rate; however, this rate is generally lower than an unsecured loan or the interest charged on most credit cards.

Second mortgages are tax deductible, a major advantage for most people. The payback period is over a fairly long period of time so monthly payments are lower and the total loan amount is generally larger. “There are some cons to consider when thinking about taking out a second mortgage,” explains Brett Bostwick, owner of Snowbird Mortgage Company. “It takes longer to get approved, there is more paperwork involved, and because it is a mortgage loan, there are closing costs such as appraisals and title searches,” he says.

Unsecured Loan

An unsecured loan is a lump sum payout that is repaid at a fixed rate of interest in equal payments over a short period of time, typically 5 years or less. Unlike a second mortgage, collateral is not necessary to secure the loan. Loan amounts are relatively small, usually less than $15,000.

Interest rates on unsecured loans, which are sometimes called signature or personal loans, are determined by whether you are considered a good credit risk. In other words, the higher the credit score, the lower the interest rate will be and vice versa. A bad credit score will earn you a higher interest rate, sometimes the same or higher than the credit card interest you are paying. This is compounded by the fact that an unsecured loan is considered a higher risk (no collateral), and lenders may charge interest rates that are often quite high, generally higher than the interest rate on a second mortgage would be, but usually less than that 18%-plus interest credit card debt you are trying to pay off.

Unsecured loans have a couple of advantages over second mortgages in that approval process is much quicker and there are no additional costs involved. Because the loan period is shorter and the interest rates are higher, monthly payments are also higher. Nor is the interest is not tax deductible. However, if you default on the loan, it may damage your credit but you won’t lose your home.

The Bottom Line

It really depends on your situation. What is best for a co-worker or neighbor might not be the best choice for you. Most experts advise getting a 2nd mortgage if you are paying off a larger amount of bills and you don’t mind paying closing costs or the longer approval process required for a second mortgage. If you need money quickly and only have a small amount of debt to consolidate, it’s probably better to go for the unsecured loan.

Of course unless you exercise restraint, change your spending habits, and stop using those credit cards, you will fall right back into credit card debt. With a little hard work and perseverance however, you will remain credit card debt freeand able to keep more of those hard-earned dollars in your pocket instead of handing them over to the bank.

Heleigh Bostwick is a respected publisher from Simple Living with a “Green” Twist. This author is a well known free-lance writer who focuses on home equity financing. You can read more refinance related loan articles at the Home Equity Loans Center. To get a free Second Mortgage Quote and get more information about refinancing and second mortgages, please visit the Second Mortgages Online.

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