What Is Equity? Suppose the value of your home is $200,000 and the mortagage value is $50,000. The equity value of your home is $150,000. Equity is the difference between the value of your home and the mortgage balance.
Home equity loans have lower interest rates that are not subject to tax. Hence, it has become the most preferred option for home buyers. People use home equity loans in case of big expenses like weddings and home renovations. However, you should be careful, since you're putting your home up as security. If you fail to pay it back, you may lose your home.
It is not advisable to take equity loans for paying off your credit card dues, especially if you cannot refrain from indulging in extravagances, as this will lead to more debts.
Types of Home Equity Loans Home equity loans are of two kinds:
Traditional home equity loan or second mortgage: The bank provides a substantial amount of cash that you must pay back over a period. Here, interest starts right on the day the bank gives you money.
Home equity line of credit: The bank offers a credit card or a checkbook for purchases. This is collected against the equity of your home. Here, interest starts only after you make a purchase.
Paying A Home Equity Loan Home equity loans can be paid in many ways. Usually, people pay them by making regular payments under the interest as well as the principal. In some loans, you have the flexibility of paying only the interest initially. Then there are loans that give you an option of getting rid of the principal faster by paying some extra amount. However, it is better to check out this option with your lender, as there are some loans that fine you for paying ahead.
How To Find A Home Equity Loan It is wise to go to a bank that is different from the one that has your frst mortgage. Always do some comparisons before making the final decision, in order to get the best interest rates and terms on the loan.
Most home equity loans have different interest rates. Some of them come with a fixed interest rate while others have small introductory rates. Certain loans come with high closing costs and annual charges.
Then there are loans featuring huge balloon payments. Others have no balloon payments and come with large monthly payments.
An After Thought Finding the best home equity loan requires some effort, but it is rewardig at the end. It can help you pay off debts or acquire money to start a new business venture.
To make things clearer, let's say you had originally bought your home for $200,000 and you have managed to pay the loan amount down to $175,000. The home has now appreciated in value and the cost of the home as per the current rates is worth $250,000. You can potentially take out a home equity loan for $75,000.
There are quite a few benefits for the borrower as well as the lender for home equity loans. For the borrower, he or she can get a lower interest rate on a home equity loan compared to other types of loans. In addition, if the borrower has bad credit, he or she may still be able to get a home equity loan.
The lender does not have a cause for worry because the borrower is using the equity built on the home as collateral. In case the borrower defaults paying back the loan, the lender can sell it off to recover the money from the existing equity. For the benefit of the borrower, the interest payable on the loan is tax deductible. Usually the home equity loan gives you the benefit to borrow a bigger amount compared to other types of loans.
If you are planning for a large expenditure or investment like buying a car, funding for education, or planning a trip, you will find the home equity loan quite helpful. The interest rates are fairly low compared to other kinds of loans, including credit cards. In some cases, you may also be able to consolidate debts that have a high interest rate and pay them off with a lower interest home equity loan.
Both David Gass & Ken Charnley 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.
David Gass has sinced written about articles on various topics from Accounting Guide, Finances and Network Marketing. David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their