Home Equity Loan

Welcome to our Home Equity Loan mini website. If you have been thinking about obtaining a home equity loan, this site should help you make that important decision. Here you will find important factors which you should consider before seeking a home equity loan, a discussion on the type of home equity loans available, news about home equity loans, and a listing of additional resources where you can learn more about home equity loans.

In an effort to provide comprehensive information to our visitors, we provide a Book Store which consists of books about the most probable reasons for a home equity loan. Our Book Store consists of books about home improvement, removing high interest debt, and how to pay for higher education. Statistically, these are the most likely reasons for obtaining a home equity loan.

To start, what is a home equity loan? A home equity loan is simply a loan borrowed using the equity of your home as collateral. The greater the equity you have built up in your home the greater the collateral? Home equity is simply the current fair market value of your home minus the amount left on your mortgage. For example, if your home currently has a market value of $300,000 and you have $100,000 left on your mortgage, then the equity in your home is $200,000. The $200,000 is the part of the home that you actually own, and therefore you can use this as collateral. A home equity loan is referred to as a second mortgage loan. The home equity loan is secured against the value of your property.

The question arises, how much money can I borrow using the collateral in my home? Lenders use what is called a loan-to-value (LTV) determination. The lender needs to know what your current LTV is, and from this can determine how much you can borrow for your home equity loan. LTV is the ratio, expressed as a percentage, of the amount of a loan to the value or selling price of real property. For example, if you currently own a $100,000 home and you have a $60,000 mortgage remaining on the home, your LTV would be 60% ($60,000 divided by $100,000 is .60, times 100 to give a percentage of 60%). If you obtained a $20,000 home equity loan, (add $20,000 to your current $60,000 mortgage), your LTV becomes 80% ($80,000 divided by $100,000 is .80, times 100 to give a percentage of 80%).

Most lenders, but not all, will allow you to borrow up to a LTV of 80%. Lets say the same home in our discussion has a current value of $100,000 and a mortgage remaining of only $10,000, the LTV is 10%, therefore you could borrow up to $70,000 which allows you to reach an LTV of 80%. The more you pay off your mortgage over time, the more equity you have built up in your home, which can be used as collateral, and the more collateral you have, the greater the home equity loan value allowed by the lender.

Some lenders allow LTVs of greater then 80%. Some allow 90% and even 125%. The problem with an allowed high LTV is that the loan will cost you more because the lender is taking a greater risk. Off course, when obtaining a home equity loan, as in any loan, other factors are considered such as credit history and your current income. As in any loan, you need to show the lender that you have the capability of paying back the loan. To obtain a home equity loan, you need to have good to excellent credit.

Lets look at some of the advantages and disadvantages of home equity loans:

Home Equity Loan - Advantages

• Because the home equity loan is secured against real and tangible collateral, your home, the lender is taking less risk. This means that the interest rate charged to you by the lender is lower then what you see for non-secure loans such as personal loans or credit cards.
• The second major advantage is that the interest you pay on the first $100,000 you borrow is tax deductible. Non-secured loans do not have this tax benefit. This tax deduction is itemized under the 1040 tax form, Schedule A. There are some exceptions to this such as taking out a home equity loan that, along with a first mortgage, raise the debt to a level above the value of the property. But for most people, the tax advantage to a home equity loan is available. For a complete assessment of the tax advantages available to you, you should consult a tax advisor.

Home Equity Loan - Disadvantages

• The major disadvantage is that if you default on the loan, you could lose your home. Plain and simple.
• As in all loans, you have to pay interest and other expenses associated with the loan itself.

Home Equity Loan - Two Types

Closed end home equity loan
A closed end home equity loan is where you get a loan consisting of one large lump some of money, and you can not borrow any more money in terms of that particular loan.

Open end home equity loan
A open end home equity loan is where the borrower can choose when and how frequent to borrow the money. This is a revolving credit loan. This type of loan is essentially a home equity line of credit.

Good Reasons for Needing a Home Equity Loan

A home equity loan can be used for anything that you want. Statistically, most people use a home equity loan for home improvements, debt consolidation, or college or some form of education. It is not wise to use a home equity loan for something that has a high depreciation rate, such as an expensive car. It is also not wise to use a home equity loan to pay for living expenses. Remember, you are putting your house on the line, so you need to make sure you use the borrowed money wisely. Basically, you want to use the money which results in the building of an asset.

Home improvement increases the value of your home. There are also tax advantages to home improvement as well. If you are obtaining a home equity loan for solely increasing the value of your home, then you need to make sure you apply improvements to such areas as the kitchen and/or bathrooms. Kitchen and bathroom renovations always add value to a home. Adding something like a pool does have the same effect as kitchen and bathroom improvements.

Many people use the home equity loan to pay off high interest debts. Credit card and personal loan debt carry a high interest. A home equity loan carries a low interest because it is a secured loan. For example, if you carry a $20,000 credit card debt at an interest of 18%, and you make a payment of say $450 per month ($150 above the minimum payment of $300), it will take you about 6 years to pay off this debt and you will have paid $13,045 in interest. If you get a home equity loan at 8% interest to pay off this credit card debt, you can pay back the home equity loan in about 4 years and 4 months, and the amount of interest you pay would be about $3,732. So you would save about $9,000 in interest.

There is also tax advantages using a home equity loan to pay off high interest debt. Simply, the interest you pay on credit cards is not tax deductible. With a home equity loan, you not only pay a lower interest, but the interest you pay is tax deductible.

Getting a home equity loan for college education is wise because you are investing in your future, or your child’s future. This creates a true asset financially because more education usually means a higher paying job in the future. Less tangible but just as important reasoning is that the additional education provides for an overall brighter future.

Home Equity Loan - Additional Resources

The following are some sources when seeking a home equity loan:

Home Equity Loan - Bankrate.com

Home Equity Loan - When Your Home Is on the Line - Information From the Federal Reserve Board

Home Equity Loan - CRHOME.com

Home Equity Loan Information

Home Equity Loan Free Information Request Form

Home Equity Loan - Buzzle.com

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Home Equity Loan - Additional Points to Ponder

Some additional points to keep in mind.

Remember that when you obtain a home equity loan, the lender will have a lien on your home. If you decide to sell your home, this lien will have to be paid off in order to deliver a free and clear title to the buyer.

Also, be aware and careful about home equity loan scams. There are unscrupulous lenders out there who like to prey on the poor or elderly, those who are in more desperate need for cash. Essentially what happens is an unscrupulous lender will set up ridiculous terms for the loan, the borrower can not meet the loan requirements, and they lose their home. Make sure you fully understand the terms of the loan.

Home Equity Loan - Conclusion

A home equity loan can be a great way to consolidate debt, improve your home, or advance you or your child’s education. It really should only be used where you are creating a tangible or less tangible asset. Because it is a secured loan, the lender is taking less risk and passes on this lower risk to you in the form of lower interest. But you the borrower is also taking a risk, in that if you default on the loan, you can lose your home. The equity that you have in your home is used as collateral, and therefore the greater the equity that you have built up in your home, the greater the loan amount allowed by the lender. There is also the tax advantage to a home equity loan in that the interest you pay is tax deductible.

We have presented both the advantages and disadvantages to obtaining a home equity loan, but only you can decide if a home equity loan is right for you.