Home Equity Loan
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Equity Loans
What is an Equity?
Equity is the difference between the fair market value of the home and the outstanding mortgage balance. So if your current mortgage balance is $100,000, and your house is appraised at $150,000, you have $50,000 in equity.
Equity in a home represents the portion of a home owned by a individual. When the house is sold the money is given to the homeowner to do with as they please.
Home equity loan, is a creative type of loan backed by the amount of equity a person has in their home. These types of loans are sometimes called second mortgage and are very common. It is important to understand that when a home equity loan is taken out on a property, the amount that is borrowed against no longer belongs to the individual. It belongs to the lender who has given you the home equity loan.
How to get home equity loan?
Home equity loans can be taken out from either the bank that provided the mortgage or by another financial institution or a mortgage broker. It is important to know that defaulting on either payment can result in foreclosure. Therefore, be sure that you completely understand the terms of your home equity loan.
Some of the many uses of a home equity loan are presented on our review of home equity loans.
Are Home Equity Loans Good or Bad?
It all depends on how you approach a home equity loan and for what reason you actually want the home equity in your hand instead of your home. If your intent is to reduce debt so that you have breathing room to pay more on other debts, a home equity loan may be on the right track. However, if your objective is to have more breathing room so that you can add more debt, you are heading for a natural disaster.
What are the basics of a Home Equity Loan?
A second mortgage - It uses the collateral of your home to secure a loan.
Good news - Because this is a secured loan, its interest is less than on many loans such as on a credit card. This is very attractive. Equally attractive is the fact that because it is a second mortgage, interest can offer a tax deduction. That's the good news.
Bad news - But if a home equity loan is used to pay off unsecured debt such as a credit card, what you have done in essence is convert an unsecured debt into a secured debt with your home as the security. This is not a very sound plan. Not only that but just as when you default on your primary mortgage you could lose your home, so too you can lose your home by defaulting on your home equity loan.
Often you can borrow more than your house is worth, that is up to 125% of the value of your home. This is called negative equity and means that if you sell the house because of a job transfer or any other reason, you must either get enough to pay off both loans or you will be paying off the home equity loan when you are trying to buy another home.
There is one other negative side to a home equity loan. You will have points and closing costs to get the loan just as you had when you got your first mortgage.
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Equity Loans
