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 ‘Guru’
Loan Guru: Disadvantages of a Home Equity Loan
December 28th, 2009Loan 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.
Loan Guru: How The Home Equity Loan Works
September 23rd, 2009Home Equity Loans have quickly grown to become one of the greatest and most popular loan types in the world today. The idea that a person that is a home owner can go ahead and get a loan taken out on their home in order to deal with any emergency situations that might crop up is something that allows a lot of people to rest easy at night and ultimately the people that are able to rest easy are going to have lower stress levels and a better all around existence specifically because of the presence of the option of the home equity loan in their lives.
Now, home equity loans are quite good and what is even better is being able to understand the anatomy of a home equity loan and exactly how it shakes out in a number of different areas.
Interest Rates
One of the biggest questions that people usually have regarding home equity loans is the question of interest rates. When you take a look at the different interest rates that are available and indeed you take a look at the interest rates for other types of loans in comparison to the home equity loan, what you immediately find is that the people that are interested in getting the home equity loan for themselves pay a much lower interest rate on average than people that are involved in other loans.
This is because home equity loans have been created from a structural point of view to resemble mortgages. The average mortgage has an interest rate between 5% and 7% annually and when you look at the average home equity loan, you find the same thing is true as well.
Monthly Repayment Amounts
When you look at the different monthly repayment amounts for the different loans available on the market today, you tend to the see the exact same thing when comparing them to home equity loans that you did with the interest rates. Namely that home equity loans usually tend to be on average 10-20% lower per month in terms of the monthly repayment amounts. This is because of the presence of strong collateral (property is the strongest collateral imaginable in a free market society) as well as the longer term lengths when it comes right down to the actual loan deal itself.
Fees
Now, home equity loans, just like mortgages, sometimes carry a fee schedule with them. The fee schedule is an idea that financial institutions to a large degree have borrowed from credit cards, because for the longest time mortgages were not as restrictive as they are in today’s world.
When you take a look at the mortgages and home equity loans in today’s society, what you eventually see is that the fees tend to revolve around things like late payments, underpayments and even overpayments in certain agreements. Either way, the fees are not really a big part of most loan agreements, but it is worth mentioning that they might be there for full disclosure.
By: Kirrhi Kreamer
