A home equity loan is money that can be borrowed from homeowners using the equity in their home. With this type of loan, a homeowner is able to borrow up to $100,000 against the value of their home. The interest on a home equity loan is tax deductible. There are two types of home equity loans. The first is a fixed rate loan and the other is a line of credit loan.
A fixed rate loan works like other standard loans. The lender provides money to the borrower and the borrower agrees to pay the loan back with interest over a set period of time. The payments and the interest rate will remain the same for the entire length of the loan. If the home is ever sold, the loan must be paid in full. The term of this loan is usually between five and fifteen years.
A line of credit loan works much like a credit card. A credit card is often even given to the borrower with this type of loan. The borrower is once again provided a certain amount of money and they can draw from this balance using the credit card or cheques that the lender provides them. The interest on this type of loan is variable. The monthly payments will differ depending on how much money was borrowed during that month and what the current interest rate is. Like the fixed rate home equity loan, the loan must be paid in full if the home is ever sold and these loans usually range in terms between five and fifteen years.
Home equity loans can be very beneficial to the homeowner that has expenses that need to be paid. They can be used to pay off an existing loan, for college tuition, or to make home improvements. There are however, some pitfalls that must be considered and watched for when deciding on whether this type of loan is the right choice.
If the home equity loan is not used properly, it can become a very dangerous situation. When individuals use a home equity loan to pay off existing debts and then use the credit that is newly available, this is called reloading. It is a vicious cycle of spending and borrowing. Reloading often leads the homeowner to take out a loan that is more than the value of their house.
Low interest rates do not apply to these loans as they are a high risk for the lender and there is no collateral if the loan is not paid off. Any interest applied to the amount of the loan that is worth more than the home is also not tax deductible. A home equity loan doesn’t make good financial sense when the value of the loan is worth more than the home as the borrower is just putting themselves further into debt instead of working to get out of debt.
Homeowner may also take out equity loans to make home improvements but these renovations need to be carefully considered. If the improvements don’t add to the value of the home, going into debt to make them also does not make good sense. For instance, a pool may often reduce the market value of the home as not all buyers will want a pool. Renovating a kitchen or bathroom however, is usually a good place to add value to a home.
When considering a home equity loan, homeowners need to do a full evaluation of their financial situation to determine if it is the right option for them.
Posts Tagged ‘Fifteen Years’
Loan Guru: Disadvantages of a Home Equity Loan
December 28th, 2009Home Equity Loans Without Perfect Credit ? What To Expect
December 24th, 2009Getting approved for a personal loan with recent or past credit problems may pose a problem. Because of credit blemishes, most lenders are hesitant to offer money to those with a low credit rating. Thus, acquiring funds for large expenses or emergencies is impossible. On the other hand, if you own a house, you may qualify for a home equity loan with poor credit. What are Home Equity Loans?Home equity loans are funds secured by your home?s equity. Because the cash is collateral-based, it is easier to qualify for these types of loans. Thus, individuals with poor and good credit may obtain a lump sum of money within a few days. If applying for a home equity loan, you can receive funds up to the amount of your home?s equity. Therefore, if you owe $50,000 on the home loan, and your home?s assessment is $120,000, the equity would total $70,000. If acquiring a home equity loan, you may get approved for up to $70,000. Why Get a Home Equity Loan?Homeowners acquire home equity loans for assorted reasons. Debt consolidation is a motive for getting a home equity loan. Through debt consolidation, homeowners are able to shrink or reduce their debts. Use the money to payoff credit cards, consumer loans, auto loans, student loans, etc. Furthermore, home equity loans are ideal for making home improvements, taking a vacation, or paying for a child?s college tuition. Home equity loans will create a second mortgage. Because home equity loan balances are smaller and the terms shorter, the monthly payments are less than first mortgages. Moreover, home equity loan balances are paid within ten to fifteen years. Home Equity Loan BasicsFor the most part, home equity loans have fixed rates. Thus, your monthly payments will remain the same for the period of the loan. If you have bad credit, these loans are the easiest to qualify for. Nonetheless, bad credit applicants should do everything possible to get the lowest rate. When shopping for home equity loans, it is important to compare rates. Contact a variety of money sources. Completing online applications with mortgage brokers will provide you with multiple offers within minutes. Furthermore, you should manage your credit score. Review your credit report and check for inaccuracies. If possible, attempt to boost your score before applying for loan.
Loan Guru: Advantages of a Home Equity Loan
December 22nd, 2009A home equity loan is often referred to as a second mortgage and it allows homeowners to borrow money using the equity they have already built in their homes. With a home equity loan, homeowners can borrow up to $100,000. The interest on the loan is tax deductible, which brought home equity loans to popularity in the 1990s when the economy was not so good.
There are two types of home equity loans. One type is a fixed rate loan and one is a line of credit. Both loan types have terms ranging from five to fifteen years and both must also be paid in full if the house is ever sold.
A fixed rate home equity loan provides the borrower with a lump sum payment. It’s assumed that the borrower will pay the loan off over a set period of time with interest. The payments are usually paid monthly and remain the same amount over the entire life of the loan. The interest rate also remains the same over the life span of the loan.
A line of credit home equity loan works with a variable interest rate and uses the same principles as a credit card. It generally even comes with a credit card. Borrowers will be approved for a certain amount by the lenders. The borrower can then use this money by using the card or the special checks that the lender will provide. These payments will also be made monthly however the monthly payment will vary depending on what the current interest rate is and how much money was borrowed that month. When the term of the loan is up, any outstanding balances borrowed must be paid in full.
Home equity loans work well for homeowners who need a large amount of money fairly quickly. The homeowner may need the money for such things as paying off another loan, tuition money, home improvements, or other unexpected expenses. Home equity loans are a good option over other loans because the interest rate on them in generally quite low and is definitely lower than the interest on credit cards and other loans. Because of this, it makes good financial sense to pay off a credit card loan while using a home equity loan. It allows the homeowner to have one single monthly bill, a lower interest rate, and a loan that is partly tax deductible.
Home equity loans have many advantages for lenders as well. After the lender has collected on the original mortgage, they then are able to collect more payments and more interest. The lender is also entitled to keep all the money from the original mortgage and the home equity loan if the borrower defaults on payments. The lender is also allowed to repossess the home, sell it again and begin the cycle all over again with the next owner.
Home equity loans can be a very wise financial decision when homeowners are trying to lower their interest rates and pay off unforeseen expenses. Borrowers must carefully weight the advantages and disadvantages of taking out a home equity loan to see if it is the right choice for them.
