If you have a home that you've been paying on for several years you may have a lot of usable money (home equity) right under your nose? A home equity loan just may be the perfect way to get your hands on that money to use for paying off those high interest credit cards, home improvemnets, college tuition, etc.!
Here's an example of how a Home Equity works:
Let's say that your current home mortgage was originally for $250,000. After several years of paying on that note you now only owe the mortgage company $150,000. In this example, you would have $100,000 in equity in your home. Now lets also factor in inflation and say your current home will appraise today for $325,000.00. So now your EQUITY is equal to $325,000.00 less the 1st mortgage of $150,000.00 which would then be $175,000.00 of potential borrowing power!
A home equity loan is a specific type of loan that will allow you to borrow against that "equity" you have built up in your home. Actually there are two "types of equity loans" to be considered. Home equity loans and a Home Equity Line of Credit.
"What's the difference in a Home Equity Line and a Home Equity Loan?"
A Home Equity Line -
* A line of credit amount established on revolving, variable rate basis. Only requires a minimum payment amount.
NOTE: Works very similarly to a credit card product with the minimum payment feature and revolving term.
* Not intended to payoff at set maturity date.
* Intended to utilize the equity in the home, usually to qualify as a home mortgage interest deduction if qualifies (to be determined with your tax consultant).
* Not recommended to use to consolidate credit card debts.
* At maturity date, remaining balance is renewed into new home equity line.
* Can usually be obtained with no closing costs promotions at lending institutions.(Most do have a prepayment penalty clause if loan is paid off in short period of time to collect their costs).
A Home Equity Loan -
* Fixed Term and Fixed Rate (usually 36 months - 180 months, depending on lender)
* Utilizes the equity in the home, usually qualifying as a home mortgage interest deduction if qualifies (to be determined by your tax consultant).
* Can be first or second mortgage loan.
* Pays off in full at maturity date, and can be accessed by payment book or automatic payment with lending institution.
* Recommended for use when consolidating consumer debts, especially credit card debt, so that will be eliminated when loan paid off.
* Can usually be obtained with no closing costs promotions at lending institutions. (Most do have a prepayment penalty clause if loan is paid off in short period of time to collect their costs).
Why would you want borrow more money out of your home? The number one reason that people take out home equity loans, or home equity lines of credit, is to consolidate their debts. Because a home equity loan is a secured loan, the interest rates are considerably lower than that of credit credits or even personal loans. So if a person had the average credit card debt of say $10,000 they could reduce the total amount of their monthly payments AND reduce how much they owed by taking out a home equity loan, or home equity line of credit. You would then use the cash to pay off your credit card debt and reduce your indebtedness by substanially reducing the amount of "non-deductible" interest you will pay over the next several years.
Another great reason for taking out a loan of this type is to make improvements on your home. Have you been thinking about remodeling your bathroom, or the kitchen, or maybe adding a swimming pool to your backyard? A screened in porch, a hot tub, or studio to your yard or maybe even a sunroom? A home equity loan is a great way to finance these types of projects.
Your first step should be to talk to your current mortgage company or your local Bank about your options, but don't stop there. You will quickly find that there are plenty of Banks and other lenders who are willing to make you a Home Equity loan or extend you a Home Equity Line of credit. So you should shop around for your the best deal - and there are plenty of good deals out there!
