How Does A Home Equity Loan Work?

[Apr 16, 2008.]

When you have need of cash for a large project or purchase, you may be able to use the equity that you have built up in your home. The longer that you have lived in your home the more equity you would have. Equity simply refers to the cash value that has accumulated in your home since you have been making regular payments over time. Here are some things you need to know about a home equity loan before you apply.

How Much Cash Is Available?

In order to determine just how much cash may be available in your home, you will need to do a little calculation. Start with the current value of your home (not the purchase price), and subtract how much you still owe on your mortgage. This will give you the amount of the total equity you have in the house.

Once you have the total amount of equity, you want to remember that you do not want to have a loan value of more than 80% of the value of your home. If you take more than this, you will need to pay Private Mortgage Insurance.

A Second Mortgage

Generally, a home equity loan is a second mortgage that gives you your equity in a lump sum. As a second mortgage, the interest rate will be higher than with a first mortgage. So, you will need to decide if you want to refinance your first mortgage, or just get a second mortgage. Both ways will give you access to the equity in your home.

They also come available as either a fixed rate mortgage, or as an adjustable rate mortgage. This gives you some flexibility, but be sure that you know the difference when you go to apply.

Repayment Options For Your Loan

Repaying your home equity loan usually means that you have a shorter time period than you would have if it were a first mortgage. Typically, you will have up to fifteen years to repay it. Some lenders may not give you this much time if your credit rating is not so good, and some may give you longer if it is good.

Purposes of a Home Equity Loan

This is one good reason why you may want to get a home equity loan. You can use the money for any purpose you want. If you just want to take a long vacation to that far away tropical place you have wanted to go all your life, or continue your education or pay for your son or daughter's college, buy a boat, reduce indebtedness, or whatever - it is there for you to use.

A Secured Loan

A home equity loan is secured by the home itself. This means that if you should for some reason default on the payments that the lender can foreclose on your home. This requires that you take careful thought about the matter of a home equity loan and do not get one if you are not sure you can make the payments. Getting the cash you want is great - but keeping your home is even better.

Be sure to look around and compare the features of home equity loans before you select one. There is a variance in interest rates and features - which you will see quickly as you start to compare some of them. There are regular closing costs and other expenses that you will incur with getting the loan.

More Information:

• Home Equity Loans - How To Get A Good One
  
  If you have a home, then you already know that you can tap into your home's equity and use it any way that you want. Many lenders have provided you with a wide variety of ways for you to access that money.


• What Is A Home Equity Line Of Credit And Is It For You?
  
  A home equity line of credit (HELOC) can be a real help to you financially if you need to get a source of money - and have some equity in your home. It gives you various options and a degree of control that you do not have with other type of mortgages.


• How To Tell When It Is A Good Time To Refinance
  
  With the economy fluctuating as much as it is today, every now and them it produces a time when it is a good idea to refinance your mortgage. You have heard of others making that change, and may have heard that some got a much better deal. Mortgages are different though, and so are people's circumstances.


• Could A Cash Out Mortgage Be For You?
  
  If you have ever wanted to get hold of some of that cash value that is tied up in your home's equity, then it is possible that a cash out mortgage may be your ticket. These mortgages are becoming popular lately because they enable people like you to get the access they want