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Home equity loans: back on the lending scene?

[May 6, 2010.]


Home equity loans and lines of credit offer homeowners a convenient way of converting home equity into cash. Typical reasons for using a home equity loan or line of credit include financing home improvements, consolidating high-cost consumer debt, or starting a business. Although home equity financing can be used for many purposes, mortgage lenders may be less lenient in approving home equity loans and lines of credit.

The Washington Post reports that home equity lending is increasing; economists are predicting a modest increase in home equity lending during 2010 with lenders expected to approve about $36 billion in U.S. home equity financing this year.

Home equity loan or line of credit?

A home equity loan, sometimes called a second mortgage, is similar to your primary mortgage loan. A home equity loan is made for a specific amount to be repaid with scheduled payments over a specific term. Taking out a home equity loan can help with paying off one-time expenses and debt consolidation.

A home equity line of credit (HELOC) is a line of credit against your home equity. Your lender assigns you a home equity credit line that you can use when needed. You pay interest only on the amount you use. Using a HELOC can be convenient for long-range needs such as starting a business or remodeling your home; you can access funds as needed. The problem with a HELOC is that it can be easy to use your HELOC for non-essential purposes; before you know it, you may owe thousands of dollars on your HELOC.

Home equity loans: your home is collateral

Home equity loans and HELOCs are mortgage loans, which means that your home serves as collateral for these loans. Each time you use home equity financing, you're reducing your home equity and increasing mortgage debt. Before taking on additional mortgage debt, it's a good idea to discuss your financial needs with a financial planner or accountant. When you compare mortgage rates, it's worthwhile to note that HELOCs typically offer adjustable rates. Home equity mortgage lenders can foreclose if you fail to make payments on your home equity loan and/or your primary mortgage loan; if you default on your primary mortgage loan, the home equity lender could be wiped out if your primary mortgage lender forecloses.

Compare mortgage rates, loan features, and repayment terms

When shopping for a home equity mortgage loan, it's important to compare mortgage rates and more. Evaluate mortgage quotes carefully, make notes of your questions and concerns, and ask for clarification when needed. Asking your mortgage questions before signing home equity loan papers can help with preventing problems later.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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