Home Equity Loans
Home Equity

Home Equity Loans: Paychecks From Your Home

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A home equity loan puts your house to work for you, creating a personal loan borrowed against the value of your home.

To understand home equity loans, borrowers need to first understand the concept of equity. Simply stated, equity is the difference between how much your home is worth and how much you owe. Let's say you have bought a house for $300,000. Your down payment is $30,000. On the day you buy the house, your equity is the value of your home minus the amount you still owe - $30,000.

Five years later, you have made payments monthly and paid around $19,000. You still owe $251,000. But during these five years your home has increased in value, to $400,000. Your equity is the home's current appraised value ($400,000) minus the amount you still owe ($251,000). Your equity in your home is now $149,000.

Home equity loans seek to free up this extra amount that exists within your equity. It is a loan that serves as a low-interest source of cash to pay off higher-interest debts or pay for home improvements, educational tuition, medical bills, weddings, and more.

To procure loans you usually need collateral, and home equity loans are no different. Collateral is property you use as a guarantee to repay a debt. In a home equity loan, you are pledging your home as collateral. Thus, home equity loans must be carefully considered and undertaken - if you do not repay the debt you incur with home equity loans, your home can be taken and sold.

There are two types of home equity loans:

  • Home Equity Line of Credit (HELOC): This is a loan that works similar to a credit card. You may borrow up to a certain amount (credit limit) over an amount of time specified by the lender. You can withdraw money as needed, and reuse credit as you pay it off. Interest rates are usually variable, meaning rates, and your payments, can vary month to month.

With this second type of home equity loan, you have options on how to repay the loan. You can opt for normal payments covering both the interest and principal, interest-only payments, and optional size payments.

Home equity loans are increasingly popular because they have significant beneifts over other loans or credit card use. While the rate on home equity loans is usually higher than a regular, or first, mortgage, the rate is generally much lower than credit card and other loan rates. In addition, you are repaying home equity loans over a longer amount of time, resulting in smaller monthly payments. Interest on home equity loans is usually tax-deductible. Consult your tax adviser for details.

While home equity loans are increasingly used by homeowners to boost their purchasing power, there are significant risks. As mentioned above, with your home as collateral you face some stiff punishment for defaulting on loans. For this reason, home equity loans should be used only for large purchases important to you and your family, and only in amounts that you can afford. Home equity loans can also have some surprising small print that can increase the risk for borrowers. Borrowers face a range of often-expensive closing costs, just as for your first mortgage.

A final risk is something called “reloading.” Borrowers may opt to take out a home equity loan to pay off high-interest credit card balances. A smart idea, resulting in lower monthly payments and smaller interest. However, some borrowers make the mistake of reusing the credit card, “reloading” their balance and increasing their debt. The best tactic is to close or store paid-off credit cards in this instance.

 

Just One Click = Today's HELOC Rates

Pennsylvania - Home Equity Line of Credit Home Equity Line of Credit - Hawaii Home Equity Line of Credit - Alaska West Virginia Home Equity Line of Credit Virginia Home Equity Line of Credit District of Columbia Home Equity Line of Credit Maryland Home Equity Line of Credit Delaware Home Equity Line of Credit New Jersey Home Equity Line of Credit Connecticut Home Equity Line of Credit Rhode Island Home Equity Line of Credit Massachusetts Home Equity Line of Credit New Hampshire Home Equity Line of Credit Vermont Home Equity Line of Credit New Hampshire Home Equity Line of Credit Maine Home Equity Line of Credit Vermont Home Equity Line of Credit Home Equity Line of Credit - New York Home Equity Line of Credit - Michigan Home Equity Line of Credit - Wisconsin Home Equity Line of Credit - MINNESOTA Home Equity Line of Credit - OHIO Home Equity Line of Credit - Kentucky Home Equity Line of Credit - Indiana Illinois - Home Equity Line of Credit Home Equity Line of Credit - Iowa Home Equity Line of Credit - Missouri Home Equity Line of Credit - North Carolina South Carolina Home Equity Line of Credit Home Equity Line of Credit - Florida Home Equity Line of Credit - Georgia Home Equity Line of Credit - Tennessee Alabama - Home Equity Line of Credit Home Equity Line of Credit - Mississippi Home Equity Line of Credit - Louisiana Home Equity Line of Credit - Arkansas Home Equity Line of Credit - Oklahoma Home Equity Line of Credit - TEXAS Home Equity Line of Credit - New Mexico Home Equity Line of Credit - Arizona Home Equity Line of Credit - Kansas Home Equity Line of Credit - Nebraska Home Equity Line of Credit - Colorado Home Equity Line of Credit - Wyoming South Dakota Home Equity Line of Credit Home Equity Line of Credit - North Dakota Home Equity Line of Credit - Montana Idaho Home Equity Line of Credit Washington Home Equity Line of Credit Home Equity Line of Credit - Oregon Home Equity Line of Credit - Utah Home Equity Line of Credit - Nevada Home Equity Line of Credit - California

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