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[W493]What Is Home Equity Line

by Ben Anton, Ben

A home equity loan is a one-time lump sum credit a homeowner can acquire by placing their residence as the guarantee for payment. This type of credit is most appealing to consumers who may have poor credit standing, but need a large amount of money. Aside from these benefits, the borrower gains a lower interest rate and the possibility of tax-deductible interest.

Why do lenders offer large amounts and charge lower interest rates? Because lenders understand that most homeowner debtors diligently pay their loans rather than risk losing their homes. Besides, the borrower cannot tuck the house away or conceal it.

The three biggest advantages a home equity loan offers are:

Large Loan Amount

The borrower can obtain as much as 85% appraised value of their home, minus the unpaid mortgage payments owed on the first mortgage. However, there are other factors as well that the lender will assess, such as the borrowers' credit standing, monthly income, or ability to pay and state of unsettled loans. If the borrowers' credit record is spotty, the loan will necessarily be smaller.

Low Fixed Interest Rate and Tax-deductible .

This type of loan has a lower interest rate, in comparison to personal or credit cards loans. Additionally, a fixed interest rate assures you that the payment remains constant right until the end of the entire loan. This makes it easy to work the monthly payments into your budget. Another advantage a borrower can claim are tax deductions on the interest of the loan for as much as $100,000.00. However, do not assume that the advertised APR (annual percentage rate) is the real rate. Ask and shop around.

Ease of Use

The one-time release of the entire loan will enable the borrower to consolidate existing debts, pay for home improvements, or use the amount for emergencies, or any big-ticket items.

The two real disadvantages are:

Home Foreclosure

If you default in paying the principal and interest fees for the loan, you will lose your home. This is certainly not the ideal type of loan for a couple who might use their retirement money to bail themselves out of the difficulty, or first time homeowners, who are inexperienced in handling finances. That is why, when you negotiate with the lender, you should ask about the penalties attached for late payments, as well as the conditions in defaulting payments and have all your agreements documented.

Long Term Repayment Period

The convenience of repaying the loan, which can vary from a 15 to 30 years period, is ultimately more expensive, because you are taking longer to pay. Another negative possibility is, if the real estate market bottoms out, you will be paying for a house which is worth a lot less. This could spell disaster especially if you are intent on selling the house. On the other hand, you are required to pay the remaining loan balance if you put the house up for sale.

Given what you now know about home equity loans, become a more prudent borrower. Carefully consider why you need the loan and if you can comfortably meet the monthly payments. Then educate yourself on the options that will best serve your financial needs and still leave you with your home.

Debt consolidation is a popular topic these days. The average American carries nearly $10,000 in credit card debt and credit card debt of $100,000 is not all that unusual. New legislation that takes effect in October 2005 is going to make it harder for those with problem debt to file for bankruptcy, so many people are trying to find ways to consolidate their debt instead. One of the most popular ways to do that is through a home equity loan, but borrowers need to be careful, as there are potential problems with borrowing against your home to pay other debts.

The concept of debt consolidation is simple. You transfer the debt from one or more high interest loans to a single, larger loan at a lower interest rate. The most popular way of accomplishing this is to transfer debt from a credit card, which often carries an interest rate of 20% or more, to a home equity loan with an interest rate of less than 10%. By doing so, you can reduce your debt payments by as much as several hundred dollars a month. Those taking out home equity loans for such purposes should be careful and be aware of the following potential problems.

Consolidating through a home equity loan trades unsecured debt for secured debt. Credit card debt is unsecured by collateral. Should you fail to pay, the credit card companies can send a collection agency after you to collect their money, but that's about all they can do. If you transfer the debt to a home equity loan, the debt becomes secured by your home. If you fail to pay that debt, you could have your home repossessed. For those who have problems paying their bills, this could represent a substantial risk.

Consolidating debt requires discipline. Some spenders cease spending only when their credit cards are at their limit. Transferring debt to a home equity loan clears the credit card balance and reduces it to zero. The debt still exists; the bill just comes from a different company. Once the bill is back to zero, compulsive spenders may not be able to resist the urge to spend more. This will leave them with both a home equity debt and additional credit card debt, making a bad situation even worse.

Debt consolidation through home equity loans is a great way to reduce debt. Debtors just need to be aware that they are risking their home when they do so and that additional spending discipline is required. Many debtors may benefit from simply canceling their credit card accounts once the debt is transferred to the home equity loan. Reducing debt is always a good idea. Debtors just need to make sure that they don't run up more debt or lose their home in trying to do so.

Article Source : Best Mortgage Refinance Rates

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Both Ben Anton & Charles Essmeier are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Ben Anton has sinced written about articles on various topics from Software, Home and Writing. . Ben Anton's top article generates over 1220000 views. to your Favourites.

Charles Essmeier has sinced written about articles on various topics from Free Credit Report Score, Mortgage and Cars. . Charles Essmeier's top article generates over 49500 views. to your Favourites.