If you are looking for basic information on home equity and home equity loans, you are on the right page. Plain and simply, a home equity loan is a loan that you take out using your home as collateral. This means that if you fail to repay your loan, the lender is authorized to take your house and sell it in order to get their money back. Because of this fact, taking out a home equity loan is a very serious commitment that should not be taken lightly. Your loan will likely be for a large amount of money. A home equity loan can be used for purchases such as home improvements, a college education or any other expenses that may come up.
Your home equity depends on how much you owe on your mortgage. You will very often hear home equity loans referred to as second home mortgages. You have to apply for home equity loans, just as you would for mortgages or second home mortgages. After you apply, you either get approved for or denied the loan. The loan is repaid over a course of years, usually between 10 and 20. A home equity loan is almost always repaid in a shorter period than a first mortgage, regardless of whether it’s a high or low rate home equity loan. You pay the same amount of the loan off every month and there is a fixed interest rate on the loan. This means, regardless of what’s happening in the economy, your loan repayment schedule and rate will remain the same.
So if you bought a house for $500,000 and paid a down payment of $100,000 and borrowed the additional $400,000, your home equity would be $100,000 and your mortgage would be $400,000. This ratio remains the same over the years, meaning as your homes value increases, so does you home equity, assuming that you are continually paying off your mortgage.
You might be wondering what you would possibly need a loan that large for now that you are no longer looking to buy a house. Probably the greatest fact about home equity loans (or second home mortgages) is that they can be used on almost anything. Many people want to add an addition their home but are unable to pay for it out of pocket. Others may have had surgery recently and are now overwhelmed with medical bills. A low rate home equity loan can be used to help pay for these expenses. As a general rule of thumb, however, you do not want to use home equity money for something that you could normally afford on your own.
As far as getting a home equity loan goes, the process is very similar to applying for a mortgage. The lender wants to make sure that you are someone who they can trust to lend out money to and that you will be able to follow the repayment schedule. They will approve the loan size you are requesting, and figure out what your interest rates will be. Your credit and income will be examined and verified as well as your loan to value ratio, which is the amount you owe on your house in relation to how much the property is worth. These three items are discussed in depth in a later article. You can also expect to pay closing costs as well as loan fees. As you can see, securing a home equity loan is a complicated process and you should be sure that it will be put to good use before you go ahead with it. Make sure that the repayment schedule on the loan is one that you can manage, and that interest rates are as favorable as possible.
Another loan you can get through your home equity is a home equity line of credit. This loan is similar to a home equity loan in that you use the current value of the house to determine the size of the credit line. The difference is that unlike a low rate home equity loan where you get the loan all at once, the home equity line of credit allows you to withdraw various amounts of money when you need them, as long as you don’t exceed your original line of credit. As you make withdrawals and then repay them, your line of credit will vary. This type of loan is helpful when you have to pay for something that you are not entirely sure what the final cost will be. The ability to have more money available over the life of the loan without having to apply again is also a large advantage. If you are still confused as to exactly how this line of credit works, then read the paragraph below.
Example: If you decide to build a pool in your backyard, and you estimate it will cost $30,000, you could simply get a home equity loan for $30,000. However, since you are not entirely sure how much the pool will cost, you decided to get a home equity line of credit for $40,000. After a few months of construction, you have spent $20,000 on the pool, and paid $4,000 back to the bank, so you have a credit line of $24,000. You then discover that the final cost of the pool is going to be $42,000. The $22,000 that is needed to pay for the pools completion is available. Had you simply taken a home equity loan out for $30,000, you would have to take out a second loan to pay for the remaining construction. It is now easy to see the benefits of taking out a line of credit when you’re not entirely certain of costs, or feel like you might need to take out another loan in the near future.
It might not always be that simple to know which is the better loan option for you. In general, if you have any doubt as to what a final project cost might be, you would probably be better off opting for the home equity line of credit. You will appreciate not having to apply for another loan, and having the flexibility of the credit line. However, if you have a definite bill for something far in advance, and you know that there are no other expenses in the near future that you will have to cover, a basic home equity loan would be ideal for you. It’s important to note that regardless of whether to take out a loan or credit line, if you sell your home within the life of the loan it has to be repaid in full at that point.
Both home equity loans and lines of credit can be a very large asset to the new homeowner. Repairs and additions that might normally be out of reach can be paid for, while at the same time, investing back in the property. For the older homeowners who might have kids preparing for college, or want to buy a large item such as a boat or RV, a home equity loan can help make it happen. Research low rate home equity loans today and you could find that using your home equity would be a very smart way to pay off bills, while at the same time, preparing for your financial future.