Loans Home Equity
Home Equity Loans
There is heavy competition among lenders in the home equity loan market and you need to use this in your favor to find lenders who are willing to give you the best deal possible
A loan based on the equity in your home, typically used for large expenditures such as major home improvement, buying another home, your college education or major medical bills. Interest can be deducted on tax returns.
A loan granted based on the "equity" a home owner has built into his owned house, ie, the excess of the market value of the house over the loans already taken. Typically, the home equity lender takes a secondary charge over the house if already mortgaged to a primary lender.
A home equity loan is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. Once you get the money, you cannot borrow further from the loan. Bank rate surveys home equity lenders and is a good source for current rates.
Home equity loans are made to homeowners and are secured by a mortgage on the property. The lien of the mortgage may be in a first or second position, and may bear interest at fixed or adjustable rates. Home equity loan or line of credit allows you to borrow money, using your home's equity as collateral. Equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have more than one on the property).
Example: Let's say you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. The day you buy the house, your equity is the same as the down payment -- $20,000: $200,000 (home's purchase price)
- $180,000 (amount owed) = $20,000 (equity).
A home equity loan (or line of credit) is a second mortgage that lets you turn equity into cash, allowing you to spend it on home improvements, debt consolidation, college education or other expenses.
Types of Home Equity Loans:
2 types of home equity debt: home equity loans and home equity lines of credit, also known as HELOCs. Both are sometimes referred to as second mortgages, because they are secured by your property, just like the original, or primary, mortgage. Home equity loans and lines of credit usually are repaid in a shorter period than first mortgages. Most commonly, mortgages are set up to be repaid over 30 years
Home equity loans and lines of credit have become increasingly common since the mid-1980s
as property values have soared and homeowners learned about managing their personal debt. Among the reasons for this surge in popularity: attractive interest rates and tax deductibility.
A home equity line of credit, or HELOC, works more like a credit card because it has a revolving balance. A HELOC allows you to borrow up to a certain amount for the life of the loan -- a time limit set by the lender. During that time, you can withdraw money as you need it. As you pay off the principal, you can use the credit again, like a credit card.
Example: Let's say you have a $10,000 line of credit. You borrow $5,000 to pay for new kitchen cabinets. At that point, you owe the $5,000 you borrowed, and you have $5,000 remaining in your credit line, meaning that you could borrow another $5,000.
A HELOC gives you more flexibility than a fixed-rate home equity loan. It also is possible to remain in debt with a home equity loan, paying only interest and not paying down principal.
A line of credit has a variable interest rate that fluctuates over the life of the loan. Payments vary depending on the interest rate, the amount owed, and whether the credit line is in the draw period or the repayment period.
During the equity line's draw period, you can borrow against it, and the minimum monthly payments cover only the interest, although you can elect to pay principal.
During the repayment period, you can't add new debt and must repay the balance over the remaining life of the loan.
Home equity loans and credit lines are secured by one's personal residence, lenders consider them almost as secure as primary mortgages.
Average rates for home equity loans and lines of credit are available from Bankrate.com's current rates of 4,000 financial institutions around the country.
People borrow against their home's equity for myriad reasons. The two most common are to pay for home improvements and to consolidate debt. Other uses for equity money: to pay tuition, medical expenses, living expenses during unemployment, and big-ticket purchases.
Pros of taking out home equity debt:
In most cases, borrowers can deduct the interest on loans up to $100,000 on their taxes. The loans carry lower interest rates than credit cards and unsecured personal loans.
They can be used for lots of things: debt consolidation, home improvements, tuition, medical costs, emergencies and big-ticket items.
Cons of taking out home equity debt:
If you default, you could lose your home, your biggest asset.
Such loans can be a risky spending tool for younger homeowners who are not established in their careers and have less experience owning a home and managing money.
The loans can be risky for older homeowners who would be tapping their nest egg close to retirement.
Credit lines have variable interest rates, so monthly payments can rise, even if your income doesn't.
If your home's value drops, you can end up owing more than the house is worth -- a bad situation if you need to sell the house.
Using an equity loan to pay off debt may make monthly payments cheaper but could cost you more in the long haul, because you're taking much more time to pay off the debt.
You may not be able to lease your home during the term of your loan.
Comparison shop and negotiate with more than one lender. Let lenders know that you are comparison shopping to ensure that they give you their best deal. At the very worst, comparison shopping may give you three similar offers from three lenders. This should at least give you comfort in knowing that you were not being taken by one unscrupulous lender who is trying to take you and your home for a ride.