Taking advantage of existing equity in your home through an equity loan might seem an intelligent choice, especially in times of low interest rates. However, before you take a home equity loan to pay for children's education, buy a car or just pay off credit cards, you should educate yourself about the risks associated with this type of finance, and whether it can work for you. In essence, a home equity loan uses the current equity you have in your home as collateral for a second mortgage. The more equity you have, the more you can borrow. As with all finance provided against security such as property, if you do not maintain your payments, you run the risk of foreclosure on your home. This fact comes as sobering news for many, so you must consider your ability to repay the loan before you borrow against the equity in your home.
Many people like the sound of this type of loan, but neither understand the concept of existing equity, or know if they actually have any in their home. Equity is how much of your initial home loan you have actually paid back. A rule of thumb to determine how much equity you might have, take your home's current value and subtract it from the outstanding loan amount. The remainder is your equity, and amongst other things will be used to determine how much you can afford to borrow. For example, if your home is currently worth $400,000 and you have $280,000 outstanding on your mortgage, your existing equity is $120,000.
This information is the starting point for any home equity loan application. Educating yourself about interest rates, home equity and the application process in general places you in a better position should you decide to apply, and negotiating a home equity loan, the more knowledge you hold at the start of negotiations, the better rate you are likely to receive
A home equity loan converts equity to cash by means of a mortgage. Equity is the difference between a homes market value and the balance owed on it. The most popular reason people cash out their home equity is for debt consolidation. Even people with bad credit can make good use of their home equity.
The optimum word in home equity loan is equity. Start with the fair market value of a home, subtract the mortgages (first and second) and any liens against the property, and what you have left is the equity. This equity can be used as collateral to secure cash in the form of a loan or mortgage.
The amount borrowed is based on a percentage of the appraised value of the home. The percentage rate can vary from 75% to 125%. The length of the financing will also vary. The two main types of home equity loans are fixed rate loans and adjustable rate loans.
Fixed rate loan - provides a fixed amount of money at a fixed rate of interest, repayable in equal payments over the life of the loan. Fixed rate financing costs more in set-up fees and comes at higher interest than adjustable rate loans. But if homeowners stay put and interest rates go up, they will save money over a comparable adjustable rate loan.
Adjustable rate loan - the interest rate goes up or down according to the index upon which it is based. Adjustable rate loans will have a cap on how high the interest rate can go. Usually called ARMs (Adjustable Rate Mortgages), this type of loan has lower up-front costs and starts at a lower interest rate than fixed rate financing. This means lower initial monthly payments.
Putting home equity to good use
According to the Consumer Banker Association, the top ten reasons for getting a home equity loan are:
9. Medical expenses
8. Business expenses
7. Household expenditures
5. Major purchase
4. Education expenses
3. Automobile purchase
2. Home improvement
1. Debt consolidation
Debt consolidation, the most popular reason people cash out their home equity, is a smart form of financing because of the money it can save. For example, say you owe $15,000 on a credit card that charges 17% interest. If you get a debt consolidation loan at 9% interest and pay it off in five years, you'll save you over $30,000!
If you're paying more than 15% interest on anything, you should seriously consider a debt consolidation loan. The right terms could drop your monthly payments by 35% - 50%, depending on interest rates, origination costs and tax consequences.
Even for people who have bad credit or who have filed for bankruptcy, a home equity loan is not out of reach. It can be a good way to make a fresh start. Web sites like Easy Home Equity Mortgages help borrowers with bad credit get the home equity loan that best fits their unique situation.
Here is a useful guide to home equity loans. A home equity loan is quite simply a loan against your house. Another term for a home equity loan is a mortgage or second mortgage. Home equity loans are also known as equity release schemes.
You are borrowing on what your house is worth. If your house is paid off, the term is "mortgage" and if your house is not paid off but has equity, the term is called a "second mortgage". For ease of understanding however, this article will refer to these loans as Home Equity Loans.
A home equity loan is a second loan that you take out on your home in addition to your mortgage. This is also called a second mortgage. This enables you to tap into your equity to get cash without refinancing your first mortgage. Many people think that the only way to access this cash is to sell their homes. The reality is that you can take out home equity loans to free it up without having to move at all!
Equity is the difference between the amount you owe on your current home mortgage and the current value of your home. Lot of finance companies today offer good deals on home equity loans, letting you borrow money based on the available equity on your home.
This can be explained further, suppose you sold your home, you will be left with a certain amount of money after paying off your mortgage, which would mean actual cash in your pockets. A home equity loan allows you to get that cash without having to actually sell your home or property.
The amount you can borrow is determined by taking a percentage of your home's appraised value and subtracting the balances of any outstanding mortgages. A home equity loan is fairly easy to get, if you are a homeowner. Some home equity loan companies will allow you to borrow up to 125% of what your house is worth at the current market prices, less the amount that you owe on your mortgage.
A home equity loan is usually a one-time loan, which is paid out in a lump sum. A home equity loan can be used for anything and is usually a fixed interest rate loan.
The cost of the loan will depend on many factors including your personal circumstances, the amount you wish to borrow and over what period you wish to repay back the loan.
Some good uses for home equity loans include debt consolidation, buying of a new car, home improvement, emergency medical expenses or luxury holiday.
People with poor credit ratings will find a Home Equity Loan more easily accessible to them because the lender is taking a lot less risk as the loan is secured against their home.
A Home Equity Loan will usually mean that you get better interest rates on the loan, but you should always remember that your house is at risk if you fail to repay the Home Equity Loan.
There are many reasons for choosing a home equity loan. A home equity loan allows homeowners to obtain a loan in addition to their original loan using the equity in their home. Home equity loans are generally a second mortgage, and are used for personal use.
Home equity loans are also known as equity release schemes. Home equity loans are aimed mainly at those homeowners that have paid their mortgages off. They can receive a cash lump sum or some income by unlocking that capital.
People take out a home equity loan for a variety of reasons. Some people do it in order to finance home improvements, buy a new car, consolidate their debts or go on holiday. Others may want to receive a regular income source so that they can pay for residential care, or just the cost of care.
Home equity loans have fixed rates with longer terms, over a fixed period of time. Home equity loans can be ideal for longer-term financial goals because you receive the amount of money you borrow in one lump sum. A home equity line of credit is similar to a credit card, where you may regularly use it up to your credit limit.
One of the premium features of a home equity line of credit is that the interest rate is typically lower than that of a credit card.
A Home Equity Loan will usually mean that you get better interest rates, but you should always remember that your house is at risk if you fail to repay the Home Equity Loan.
The amount you can borrow with a Home Equity Loan depends on the amount of equity in your property. Equity is the market value of your property minus any outstanding mortgage or loans you have on it.
People with poor credit ratings will find a Home Equity Loan more easily accessible to them because the lender is taking a lot less risk themselves. Home equity loans are also beneficial for people with a poor credit rating. A lot of traditional lenders categories such people as "high-risk". Home equity loans for such borrowers don't pose any risk as in case the borrower defaults on the repayments, the lender can sell the house to reclaim the money from the available equity.
Here are some of the benefits of a home equity loan:
A Home Equity Loan is an easy and manageable route to generating extra cash. Using Home Equity Loan for debt consolidation means that with one single payment each month, you have more control over your monthly budget. With a re mortgage you have the same expenses you do when taking on a mortgage: surveys, valuation, mortgage indemnity and solicitors fees to pay. With Home Equity Loan you have none of this, making it easier to arrange.
Repayment period on Home Equity Loan can be anything from 5 - 25 years.
You can use Home Equity Loan for any purpose - for example, debt consolidation, home improvements, buying a car or going on holiday.
Protected payment plans for Home Equity Loan can provide extra peace of mind.
Always consider your options carefully, as your home is at risk if you do not keep up repayments on a mortgage or other loans secured on it. Home Equity Loan - An extremely popular and efficient way to borrow is using the roof over one's head as collateral for sizable amounts of credit. To define a few terms, equity is the difference between your home's appraised - or fair market - value and your outstanding mortgage balance. A loan refers to the amount of money you borrowed from a lender providing you with the mortgage. So basically, the idea with home equity loans is to borrow against your home's equity as a very effective way to get some things you need at a good price.
Why Home Equity Loans are popular
To be sure, borrowing against the value of a home has become increasingly popular. Why, you ask. There are two key reasons for this surge: low interest rates and tax deductibility.
The tax changes that occurred in 1986 have eliminated deductions for most consumer purchases. As a way to get around these changes in tax, consumers began borrowing up on their home value in order to make purchases. Home equity loans thus became a method adopted by homeowners to buy goods and still get a deduction.
For instance, let's say that you bought your home for $95,000 and made a 20 percent down payment of $19,000. To pay the remaining $76,000, you then took a first mortgage. On the day you closed on your home, you automatically had 20 percent equity. As you pay off the principal, you gain equity and your home grows in value.
Now, let's say that you have paid $12,000 toward the principal and your property. Remember that you property was valued at $95,000 when you bought it. Now, since you have made the payment on your principal, your $95,000-home is now worth $115,000. Your beginning equity ($19,000), plus the principal you have paid ($12,000) and the increase in your property value ($20,000) gives you $51,000 in equity.
Home Equity Loans: Equity as a Valuable Asset
Banks and borrowers both benefit from home equity loans. The reason for this is that equity is a valuable asset to have. You can put it to use without having to sell your home. And because most people's domicile is their biggest asset, lenders regard home equity loans as secure. For that reason, interest rates for home equity loans are lower than for other loans.
Who are the best borrowers of Home Equity Loans
Earlier in the article, we have made mention that home equity loans are beneficial to both the lender and the borrower. However, like all things, home equity loans also have their downsides. The disadvantage to home equity loans is that if you default on the loan, the lender could foreclose on your home. For this reason, home equity loans are statistically most suited to stable, middle-aged borrowers.