Mortgage Loan Types: Home Equity Loans

Debt Consolidation

Mortgage Loan Types: Home Equity Loans

25th Spetember 2007

Usually home equity loans are obtained when the borrower is looking for refinancing either as a means of debt consolidation or simply to renovate their property. Some people have been known to choose refinancing to start a business. Whatever your reasons for choosing or considering a home equity loan, finding out what home equity is all about and whether it is for you is important. Okay let's lighten up it's not as complicated as it sounds!

Financial Intelligence What is home equity? It's the difference between the current market value of your house and the amount still owed on the mortgage. That difference is what you can borrow in cash but its not advisable to borrow the whole amount. What I am saying here is that home equity is ownership that has built from mortgage payments and appreciation in value of the property. Okay so let's go over that again with numbers this time. Here's a simple equation (current market value - amount owed on mortgage = home equity). I'll use estimates for my own mortgate here: $120,000.00 - $89,275 = $30,725. So if I refinance I could get a loan of up to $30,725. Home equity loans can offer you significant tax savings due to the fact that the interest paid on a home equity loan is tax-deductible.

Home equity loans come in two forms. The loan itself can be taken as a fixed rate and your repayment is fixed as well. There is also the home equity line of credit. With a home equity line of credit the repayment and the rate are flexible. You also only pay interest on the amount of the line that you use and the rest is available for you when and as you need it.

There are many benefits to using a home equity loan when refinancing. Speak to your lender about hidden costs though because some lenders will not tell you about it until after you obtain the loan. Important to note is that mostly your home will be used as collateral for the loan so be sure you can afford to borrow against your home because you could lose it if something goes seriously wrong.

"The only thing money gives you is the freedom of not worrying about money."
- Johnny Carson

Comments (12):

Rose Says: A colleague of mine lost his home recently due to defaulting on his home equity loan to a point where he couldn't pay for it anymore | 09.25.2007 |

Magnus Says: Sorry about your colleague but he should have assessed his financial situation properly before taking on a loan and putting his home up as collateral | 09.25.2007 |

Eugene Says: Ignorance is costly. Ofcourse with refinancy mostly its your home that is the collateral. This is why you need to equip yourself with knowledge before you do anything | 09.25.2007 |

Jasmine Says: I took a home equity loan to pay off my debts although I am managing I am seeing now that perhaps I should have negotiated to pay off my debts with my creditors instead as it has turned out to be more costly so don't be pressured by bad debts rather use reason | 09.25.2007 |

Irene Says: I got a home equity two years ago and I found that getting refinancing from the bank was cheaper than other lenders at the time so shop around | 09.25.2007 |

Helen Says: I think the banks are still better even now. There was a scandal with home equities by Metro Dream Homes who were supposedly investing mortgages for home owners. Just thought I'd mention that to remind you that its better to take your chances with established banks | 09.25.2007 |

Nelson Says: It's sensible to use home equity to start a business or pay for college but I don't think it's wise to take for paying off short term debts like credit cards. Just my two cents | 09.25.2007 |

Edgar Says: I agree Nelson if you do the maths and look at the whole picture in the long run its better to pay off short term debts by other means rather than a home equity loan | 09.25.2007 |

Maureen Says: That full picture you are talking about is never painted for a borrower because the lender is there to make money and by telling you they might lose | 09.25.2007 |

Xander Says: And that's exactly why its important to know what your options are and what it means to take them before you go out and take them | 09.25.2007 |

Lee Says: I also think this would be a good option if you wanted to start a business. I don't think that if one has bad credit you should be looking for home equity | 09.25.2007 |

Kiwi Says: It is better to use equity only if you are financially sound I think. I've heard of people go on to lose their homes because of home equity loans | 09.25.2007 |

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Mortgage Loan Types: Home Equity Loans

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