Home Equity Loan Basics A Home Equity loan is a method by which one can use the equity that he has accumulated over the years in his home. Home equity can be described as the amount of money that is equivalent to the difference between the market value of your home and the outstanding balance on your mortgage. For instance, if your house is assessed at $300,000 and you have a loan of $200,000 for your house, then you have $ 100,000 of home equity. You can get a lump sum of cash by borrowing on the equity of the house through a home equity loan.
The concept of home equity loans To obtain a home equity loan, you would have to go through a loan provider, which is commonly a bank. The lender will then assess the market value of the home to lend you money and check your credit score and the ratio of your debt to your income to see if you qualify for a loan and at what interest rate. It is usually a fixed-rate loan with maturities ranging between 5 and 30 years and where you can borrow up to 85 percent of the value of your home, less the mortgage balance.
For instance, if your house is worth $300,000 and you currently owe $200,000 on your mortgage, then the maximum amount you can normally borrow using a home equity loan would be 85 percent of the $100,000 equity you have accumulated, which is $85,000.
The first thing to note is that when you make your monthly payments, most of your payment goes toward the interest of the loan. In the long run, a larger portion of the monthly payment is allocated towards paying off the principal amount. The loan is secured by the equity that you have in your home. This means the lender has the option to repossess your home if you fail to make the agreed payments, thus making it easier to qualify as compared to other loan products. The interest rates are also typically lower than those charged on unsecured loans.
Applications of Home Equity Loans There are several common uses for home equity loan funds, including:
There are several common uses for home equity loan funds, including:
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Home renovations – Spending the lump sum to pay for a kitchen remodel, basement finishing, deck construction or any other home improvement project.
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Debt management – Using the home equity loan to clear credit card balances and other loans of higher interest rates than the loan being taken. This enables you to cut down your monthly installments, eliminate debts effectively and save more on interests.
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College tuition – Using equity to assist in funding tuition at a college or university, junior college or technical/vocational school where college savings prove insufficient.
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Medical expenses – For paying off high-cost but unforeseen treatments that the health insurance does not cater for.
- One off expenses – All significant purchases that require funding such as buying a new or used car, investing in a
piece of real estate, funding the start up of a new business and so on. The loan is useful when one cannot afford to withdraw a large sum from savings or when one cannot access a higher-interest loan such as a personal loan.
Home Equity Loans: Advantages and Disadvantages By so doing, home equity loans provide homeowners with an opportunity to access funds for the purchase of big-ticket items or any other expenditure and without having to sell their house or take another home mortgage. However, there are some downsides to weigh as well when considering borrowing against your home equity:However, there are some downsides to weigh as well when considering borrowing against your home equity:
Pros:
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It has lower interest rates than most other financing options
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They pay interest which is often a tax credit.
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Lower installment costs than credit cards or other expensive debts
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This in an excellent chance to combine all the debts into a single payment that can easily be managed.
Cons:
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Initial costs and other expenses that come with finally signing the dotted line.
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Delaying payments over the life of a loan and thereby paying more interest.
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Some of these include inability to pay the loan as agreed may lead to foreclosure of the home.
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Second lien against home increases the complexity of the sale
- Homeowner equity built up if home value goes down, if yes, reduction in equity built up
But whether it will be wise to do so will depend on your circumstances. Call a loan officer at the bank of your choice to talk more about how one qualifies for the home equity loan and how one pays it back. They can help to advise on whether it suits your requirements and long-term vision for your residence. Take your time and think through the advantages and disadvantages in order to come up with the best decision.
