Home Equity Loan Overview

Home Equity Loan

Home Equity Loan

A home equity loan is a loan that uses the the value of your home as collateral. Many people use these kinds of loans to finance large expenses like a home renovation, college degree or medical expenses. The loan will reduce the equity in your home.

There are two types of home equity loans:

  1. Home equity term, a fixed term loan
  2. Home equity line, a line of credit which is a variable term loan

You must have very good credit history to obtain a home equity loan, as well as good “loan to value” ratios. Both kinds of home equity loans are commonly referred to as 2nd mortgages. You can also use home to refinance your mortgage and remove other debts that you may have, so you may be able to save money by reducing high interest loans in favor of a home equity loan.

One nice benefit from equity home loans is that you are able to deduct the home equity loan interest from your income taxes in many countries, including the United States.

The home equity line of credit loan is a continual line of credit that features an adjustable interest rate and can be utilized for a wide range of expenses. With a home equity line, you can choose how often to borrow against the equity of your home to a certain extent – the value of your home determines how much you can borrow in the end. Home equity lines usually have a hard limit as to how long they can last for, of 30 years.

When obtaining a home equity loan, it is important to consider the number of fees which may be involved. These can include early pay off fees, closing fees, arrangement fees, stamp duty, appraisal fees and more. You will have to get your home valued which is done by a licensed surveyor, the value they place on the home going into the equation that determines how much you can borrow. There may be fees involved in determining the title of the property, so the bank knows that you own the property and there may be fees to determine how much money is owning on the property if any.

You should be very careful about obtaining this kind of loan due to the fact that you are risk a prized asset – your home. You should take a hard nosed look at your assets and income before entering into a 2nd mortgage and if need be, consult a financial professional. The bank will be interested in giving you the loan when you have a valuable asset to offer as collateral, so you cannot trust their advice as to what you can afford to pay back.

Here are some simple tips to help you stay out of trouble and get good value for money with a home equity loan:

Get a wide range of quotes from a number of sources. One of the best ways to do so is to go online and seek advice from financial discussion forums.

Don’t borrow too much. When you have such a large asset at your disposal, the bank will often tell you they can loan large amounts to you. But you should consider the extra debt very carefully, because it can be a struggle to pay back, don’t let a bank representative talk you into too much. Only borrow what you need and don’t forget what is at risk.

Check that you can afford the repayments. Make sure you understand the fine print in the loan – the fees, the interest rate, the type of rate (fixed or variable) and payment frequency (monthly, weekly, fortnightly). Make sure you can easily afford the repayments and that it does not come to more than 30% of your after tax income.

Consider loan terms. Make sure you understand how long the loan will go for, because there may be early repayment fees. Are you close to retiring, you should be careful about how long the loan extends for because your financial situation will dramatically change when you retire.

Examine Penalty Fees. Make sure you don’t incur large penalty fees for late repayments. Just like any loan, carefully examine payment fees.

Only use well known well known and trusted lenders. Don’t risk your home by entering into a loan with a dodgy financial institution which may have strange and unusual requirements in their home equity loans. Don’t risk your prized possession by entering into an agreement with a dodgy lender.

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