Mortgage Greensboro NC
Home Equity Loan
Home Equity Loan - Overview
A Home Equity Loan is one in which you use the collateral in your home in order to get a loan based on the equity that you own in your home. The equity is the part of the home that you own and is found by subtracting the amount still owed on the home from the value of the home. Suppose you purchased a home for $100,000 and put $20,000 down when you first bought the home. Immediately, that $20,000 down payment turned into the equity that you have in your home.
Now, you have to take more into consideration when you are trying to figure out how much equity you have in the home. Suppose you have paid on your home for a few years now and you have managed to pay $12,000 on your home. Let's further suppose that in these last few years your home has appreciated in value and is now worth $115,000. You would figure the equity as follows:
$115,000 (the value of the house) minus the amount left on the loan ($80,000 - $12,000 = $68,000) = the amount of equity you now own in your home which is now $47,000. For one thing, you can be happy that your $32,000 investment has turned into a whopping $47,000 so for a lender that is willing to lend 100% of the equity based on an appraisal of course; your home equity loan could be as much as $47,000.
There are some lenders that won't lend under $50,000 on a home equity loan so this is not the route to go if you only want to borrow five or ten thousand dollars. In some cases, you can arrange a home equity line of credit which allows you to borrow on the equity in your home as you need to, not in one lump sum. This HELOC is an effective option for many people, and is an alternative to other financing for home repairs and other expenses. In other situations, you would want to pursue a personal loan. Pursue a home equity loan when you need to borrow big bucks however make sure you can afford to make the payments or you will place your home ownership in jeopardy.
Why get a Home Equity Loan?
People take out home equity loans for a lot of different reasons. The commercials you see on television mention several things you can do with a home equity loan but the truth is, in most states anyway, you can do anything you want with the money. Your credit score, income and the amount of equity you have in your home will determine if and how much you can borrow, not what you will do with the money.
However, just because you can doesn't mean you should. You are putting your home up as collateral so you want to make sure you can afford this loan before you accept it. If you want to pay off credit cards that are costing you 14% interest and you manage to get a home equity loan for 8%, then that might be a good idea if and only if you have the discipline not to run the credit card balance up again. If you do, you'll have that to pay and your home equity loan payment. Using a home equity loan to reduce debt is only a viable option if you have remedied the situation that caused the initial debt. Keep in mind as well, that by consolidating your debt with a home equity loan, you do place your home at risk, whereas it was not before.
If you are wanting to make improvements to your home that will increase the value of your home and if you can afford to make the payments, then that would be a good reason to take out a home equity loan. By improving your home the equity you have in it will most likely increase and you may even come out ahead in the long run. Again, make sure you can afford the payments because it won't matter how valuable your home is if you lose it.
Sometimes people take out a home equity loan because they have an emergency such as medical bills or need medical treatment. You can't enjoy your home if you don't have your health so if this is something you need to do then a home equity loan might be a viable option for you.
Line of Credit vs. Lump Sum
Depending on your credit and your lender, you may have a choice between a line of credit and a lump sum. A lump sum of course, means you get the entire loan all at once and up front. You may have a 15, 20 or even 30 year loan depending upon the terms of the home equity loan. Like any other loan, you'll make payments every month.
A line of credit however is altogether different. The interest rates are similar but by taking out a line of credit, you won't have the amount of the loan to use all at once. You'll receive a checkbook or a credit card with which you can make "withdrawals" upon this line of credit up to a predetermined amount. You may still have as long to pay it back as with a lump sum if you choose.
Generally, you will have a small payment every month that may just go towards the interest and then you'll have what is referred to as a "balloon" payment where the bulk of the loan is due at the end of the loan term which could be 15 or 20 years down the road. This can sound very attractive however, that huge balloon payment will come due eventually and if you can't pay it you will lose your home.
A home equity line of credit, or HELOC may be the preferred method of home equity loan in several different situations. Suppose you're taking out the HELOC because you need expensive medical treatments but you only want to borrow as much as you absolutely have to. Or you're remodeling your home but again you only want to borrow as much as you have to.
Either of these situations would be appropriate situations to arrange a HELOC. By not borrowing the maximum amount of equity you most likely will be able to pay it back early yet the line of credit will be available if you need it. A HELOC is a useful option that allows you to tap into your home equity without incurring substantial debt.