A homeowner with equity in the home? Big chances are that you can put your home equity to work – converting it into hard cash to quench your thirst for money! Today, many people turn to home equity loans for support on renovating homes or financing business, education or other expenses, as the loan rates of this kind are significantly lower than other types like credit cards or personal loans, plus, the closing cost of a home equity loan is relatively lower as well.
If you are currently financially strapped and looking for an opportunity to get by in these difficult times, our article will show you the way by explaining the function and types of home equity loans.
Understanding Home Equity Loans
Simply speaking, a home equity loan is a type of mortgage loan which allows homeowners to borrow money with the equity in their homes as collateral. This type of loans is quite useful to finance expenses like home improvement, medical care, and college education. If your home is worth $100,000 and you have no current mortgage on it, you may be eligible for a home equity loan at 80% loan to value (that would be $80,000).
However, it is quite notable that as a home equity loan would create a lien against your home, your home equity will be reduced consequently.
Actually, home equity loans are also referred to as second mortgage as they are subordinate to your primary mortgage and secured against the value of your property. In the US, it is possible, sometimes, to deduct home equity loan interest on the borrower’s personal income taxes. That’s why the year of 1996 sees the exploding popularity of home equity loans, for they offered an effective way for people to avoid that year’s tax charges, as the interest could be deductible within certain limit.
Home Equity Loans VS Home Equity Lines of Credit
Many people may take home equity loans as home equity lines of credit (HELOCs). However, distinctive difference does exist between the two! A home equity loan (HEO) is a fixed-rate loan which requires the borrower to pay interest and principal each month, the payments of which are higher than those of HELOCs.
HELOCs function much like credit cards, except that the interest rates are relatively lower. It is a kind of resolving credit loan with variable interest rate, in which the lender agrees to lend the maximum amount of money within a term, and the borrower can choose when and how often to borrow against the equity in his home property. By the end of the term, the borrower has to make full payments of the outstanding balance.
Equity VS Collateral
Though we say that home equity loans use the borrower’s equity in home as collateral, what equity and collateral refer to are different!
Equity means the difference between a home’s market value and the outstanding balances of all loans on the property, while collateral refers to the property you use as a guarantee that you will repay a debt by the pre-defined term. If you fail to repay the debt, the bank or the lender will forfeit your collateral and sell it to get money back. While entering a home equity loan, you are pledging your home as collateral. You will be forced to move out of the home if you can not pay off the loan.
• For example, let’s say you purchase a home property at $200,000. You make the down payment of $30,000 and borrow $170,000 from the bank. By the day you buy the house, the equity of your home is equal to your down payment – $30,000.
For the following 5 years, you have been making the monthly payments, and have paid down $15,000 of the loan, thus you still owe $155,000 on the mortgage. By the same time, the value of your home is increasing, and now it is worth $350,000. Now, your home equity is $195,000 ($350,000 minus $155,000).
If you now have hard times to get through and looking for a specific amount to finance, consider home equity loans which use the equity in your home as the collateral to generate cash flow.
Many of us can handle complicated, overwhelming duties. We can be multi-tasked. We can face down aches and pains and work long hours on much-anticipated but intricate projects. We perform perfectly when it comes to big projects.
When debts hit, they hit hard. Credit card debit in the United States, for example, reached record-high at over 951 billion dollars as of 2008. When deep in hot water with hiking debt, we cast about for solutions.
Deduct the outstanding balance on the mortgage from the current market value of the house, and you get home equity. We accumulate home equity either by making payments towards that balance or by taking advantage of the appreciated property value.
It’s human nature to appreciate good stuff. When coming across something very good, we can’t drop it. It is the same thing like playing video games, staying up late watching the World Cup, going on shopping spree, or gorging down Doritos pack after pack.
Every now and then, rainy days hit. We’d use savings to get through these days if we have any. However, saving is pretty much the thing of the past. Seizing the day predominates. Meanwhile, economic meltdown and mortgage payments and other expenses don’t cut us any slack.
By leveraging the equity built at home after years of mortgage payments, home owners can get a home equity loan. With this loan, they can have access to cash. With that amount of cash, they can do whatever they want.
I got one thing to clarify: the two words “home improvements” don’t just hang on our lips. If anything, they stay. Bragging about American Dream when you have no roof over your head, isn’t it pathetically ridiculous? Housing, regardless of the changing of times, tops our list of priority.
Need money to pay for your home repairs or higher education? If so, the source could be right under your feet – a home equity loan. It is no secret that houses in today’s real estate market are so expensive that fewer people can afford one.