The equity of a house can at times come to the rescue of the owner. Without losing ownership, he can advantage from the equity of his home by taking home equity loan to meet urgent financial requirements.
Home Equity Loans are based on the equity of the home. In these loans the equity of the home is accepted as collateral. So a homeowner is only eligible for home equity loans. The equity of a home is the market value of the home minus the outstanding mortgages against it. So if the market value of a home is £200000 and the outstanding mortgages amount to £70000, then the homeowner has £130000 as the equity to get a loan.
Home owners can get these loans in two forms, as home equity loans and as home equity line of credit popularly known as HELOC. In home equity loans, the entire loan amount is given to the borrower as a lump sum. Interest starts accruing on the loan amount from the day it is disbursed.
However, in HELOC, borrowers can withdraw money according to his needs up to a maximum limit he is entitled to. The scheme acts like a credit card. Here interest is charged only on the amount used and not the entire amount.
In home equity loans, the borrower is generally entitled to get only 80% of the equity of the home. There are, however, borrowers who give loan amounts up to 125% of the equity. With home equity loans one can borrow money in the range of £5000 to £75,000. Repayment terms ranges between 5 to 25 years.
Home equity loans offer cash relatively fast and at low interest rates which control the cost of the loan. Another big advantage of these loans is that the interest is tax deductible.
Before taking a home equity loan the borrower should find out the equity of his home. For getting deals suitable to him, he should do proper research both offline and online. He should not rush in to grab whatever is nearer to his hand.
By: Dina Wilson
Posts Tagged ‘Credit Card’
Home Equity Loans: Financial Aid Against Home Equity
December 26th, 2009Which Home Equity Loan
December 17th, 2009You are in need of money and have decided to get a home equity loan, but want to know what options are available to you. Which home equity loan is right for you? What is the different between them? A home equity loan is the amount in between what your house is worth and how much you owe on your home. It is secured by the amount of equity in the home and can be taxable. It can lower your interest as well as giving you a fixed rate. You have two options when making the decision. First, you can receive a home equity loan. With this one you get a lump sum of money, at a fixed rate, and one monthly payment. When you pay it off that is it, your debt is gone. Another option is a home equity line. With a home equity line you receive a line of credit that is available for you to use for a certain time frame. You can use it and pay it off, then use it again. Just like a credit card. The interest rates are variable and you only make payments on the amount you use, not the amount you have available to you. If you know what you need the money for and how much, then a home equity loan would be your better choice. However, if you don’t know how much your project is going to cost and/or know it will be paid off in a certain length of time, then the home equity line would be better for you. It all depends on what your needs are at the time.
Home Equity Loan – A Popular Fund Raising Option
December 5th, 2009Home equity loans have become one of the most popular fund raising options for individuals.
Home equity loans are the loans taken using your home’s equity as the collateral. Thus they are a type of secured loan.
These loans are based on two facts – first, that you have repaid a certain portion of the home mortgage and thus should be able to reutilize that equity; and second that the value of your home has increased since you first purchased it.
The common reasons for taking an equity loan are home improvements, educational expenses, medical bills, debt consolidation etc. There are usually no restrictions on how the borrowed money is used.
The interest paid on such loans is usually tax deductible. Also the interest rates on them are lower than credit card other type of consumer loans. (They are higher than the first mortgage.)
Let’s understand what “home equity” is.
Home equity is defined as the difference between the market value of your home and how much you owe on the mortgage (or mortgages in case you have more than one.)
The market value of your home will be determined by bank’s appraiser or a licensed appraiser.
Suppose market value of your home is $ 100,000 and you have made a down payment of $ 10,000.
Then your equity
= market value – amount owed
= $ 100,000 – $ 90,000
= $ 10,000
After three years if you have paid back $15,000 more of the debt, you will still have $75,000 of the debt left. However after three years the market value of your home would have increased to $ 150,000.
Thus your equity after three years would be
Market value – amount owed
=$ 150,000 – $ 75,000
=$ 75,000
Besides home equity loans (fixed rate home equity loans), there is another type of home equity debt – home equity line of credit or HELOC.
Both of them are known as “Second Mortgages” as they are secured by your home just like the first mortgage.
“Second Mortgages” are repaid sooner than the first mortgages, which are usually repaid in thirty years. Home equity loans usually have a time frame of five to fifteen years.
Home equity loans are a one time lump sum loans, that are repaid over a time period decided beforehand.
On the other hand, home equity line of credit or HELOC allows you to borrow up to a certain limit for the period of the loan. The time limit of the loan is set by the lender. You can withdraw money any time during the time period and repay it any time. It works the same way like a secured credit card.
A HELOC has a variable interest rate that varies through out the period of the loan. The HELOC interest rate depends on the prime lending rate (prime lending rates are fixed by the federal reserve in the US.) The payments can vary depending on what is the amount that has been borrowed, the interest rates and whether the loan is in the draw period or the repayment period.
The credit rating of the borrower is also a factor in deciding the home equity loan interest rates.
The draw period of the line of credit is the period during which you can borrow any amount up to the limit specified by the lender. Also only the interest has to be paid during this period; however you may choose to repay the principal amount if you wish.
During the repayment period, no new debt can be taken and the existing debt must be paid back.
Usually draw periods are for ten years and repayment periods around fifteen years, but this varies depending on the lender’s policies.
Withdrawals for HELOC can be done by checks, credit cards or EFT. Lenders may have certain terms which make require you to take an initial advance when the HELOC is setup, borrow a minimum amount each time you use it and keep a minimum outstanding balance.
If you decide to sell off your home, you have to pay back full amount of the home equity loan.
By: Sachin A
