Understanding Home Equity Article

Important Home Equity Loan Information

For those of you who just purchased your first home, and are not familiar with home equity or home equity loans, we will try to help you learn the basics in this article. When someone refers to equity in your home, they are talking about the how much your home has appreciated in value since the time of purchase, or how much more your home is actually worth when compared to your current mortgage balance. Most people who own their own homes consider them to be their pride and joy, and therefore, they spend a lot of money on updating and maintaining their homes. This money that is spent adds more equity into the home.

When you take out a home equity loan, you are using the equity in your home to secure the loan. In other words, if you have built up $50,000 in home equity over the years, and find that you need a new roof, or need some foundation work done, you can use this equity to obtain a loan to get the funds that you need to pay for those repairs. Some people even rely on home equity loans to payoff high interest debts; send their children to college, or payoff mounting medical bills. The lender puts a lien on the home, meaning that if you default on the loan, the lender can take it to recoup their loss. A lender could take your home valued at $100,000 or more, because you default on a $20,000 home equity loan, meaning that they stand to gain a hefty profit from your default, so keep this in mind.

To get a home equity loan with good terms, you will need to have a decent credit rating, not necessarily perfect, but good. There are two different kinds of home equity loans currently available, open end and closed end. Typically both types of loans qualify as a second mortgage, but will have much shorter repayment terms. You may be able to claim a tax deduction on the interest you pay each year towards your home equity loan, so you can save some money there.

If you take out an open end home equity loan, it is more or less a line of credit, meaning that as you pay the balance down, you can typically borrow up to the maximum amount again. The terms of these loans vary greatly from lender to lender, so you should take your time and shop around for the best deal. These loans are pretty popular, since homeowners can go get money whenever it is needed, without having to go through the entire process all over again every time.

With a closed end loan, you apply for the amount of money you need, close on the loan, and cannot take out more until the loan is paid off, unless you go through the loan process again. The total amount you can borrow will depend on many factors, the lender’s policy, your credit rating, your monthly income, the value of your home, and in some instances, legal regulations in the state you live in. Typically, these loans come with fixed interest rates, with varying monthly payment amounts.

Home equity loans are rapidly gaining in popularity, and are often used more commonly to payoff debts, particularly credit cards, than they are for home repairs. The golden rule with home equity loans is to make certain you don’t overextend yourself and lose your home!