Home Equity Loans

Equity is the difference between how much your home is worth and how much money you owe on it. For example, if your home is worth $250,000 and you owe $200,000, your equity is $50,000.

If you need cash to make home improvements, finance a college education or consolidate some pressing bills, a home equity loan might be a consideration. It is basically a second loan that you take out in addition to your first mortgage and is usually referred to as a “second mortgage”. If you have a good rate on your first mortgage and would like to have your cash in a lump sum, a home equity loan may be a good choice. You can use the equity in your home without having to refinance your first mortgage. In addition, home equity loans are usually approved in a much shorter time than your initial mortgage.

A benefit of a home equity loan or second mortgage is that the interest may be tax deductible. (Be sure to discuss this with your tax adviser.) Additionally, home equity loans usually have fixed interest rates and your monthly payment is always the same.

A home equity line of credit might be another consideration to obtain cash from your home. This is very similar to a credit card except for the fact that the equity in your home is used as a revolving line of credit. The benefit of this type of loan is that you may obtain a lump sum upon closing or you may use some of the money up front and use the rest when it is needed. You are not required to make any payments until the money is used. This type of loan can usually be obtained in about ten days. It is convenient for those who wish to use the equity in their home instead of their credit card for a lower rate of interest and the benefit of a tax advantage.

The amount of money lenders will allow you to borrow depends upon how good your credit is which takes into consideration your income and credit rating as well as the total amount of debt outstanding. Some lenders will let you borrow up to 85% of the appraised value of your home less the amount you owe on your first mortgage. For example, if your home is appraised at $300,000 and you still owe $200,000 on your first mortgage, you may be able to obtain a home equity line of credit of $85,000 ($300,000 - $200,000 = $100,000: 85% of $100,000 = $85,000).

However, when you obtain a home equity line of credit, you should be aware you are using your home for collateral for the loan. If for some reason you are late in making payments or unable to make the payments required, this may place your home at risk.