Home equity loans use the value of your home as collateral for a personal loan or line of credit. They can be a good deal for consumers who seek to renovate their homes or pay off existing loans with high interest rates.
However, like any other loan, home equity loans shouldn't be acquired for frivolous reasons. Using the value of your home without specific financial goals could lead to subsequent financial difficulties, including the loss of your home.
What is the difference between a home equity loan and a home equity line of credit?
A home equity loan provides a cash payout that varies according to the amount requested and the equity in your home.
A home equity line of credit establishes a revolving credit line that is limited to the amount for which you qualify. You can use this credit line on demand, and only pay interest on the amount you use.
Unless you intend to make a larger purchase or wish to have immediate access to a large sum of cash, a line of credit will save you money on interest charges that begin to accrue immediately after loan proceeds have been dispersed.
What is the procedure for obtaining a home equity loan or line?
After applying for a home equity loan product, you will be required to obtain an appraisal of your home's value to determine if you have sufficient equity to cover your loan request.
The appraiser must be hired or approved by the lender to ensure that the home is valued according to their standards. Appraisal fees will cost several hundred dollars, and can be included in the closing costs when the loan is finalized or paid up front by the borrower, depending on the lender.
The appraisal will note the size and condition of the home, but will also consider the median sale prices for similar homes in the area. Location can be an important factor in determining the value of a home.
After the appraisal is completed, and any remaining mortgage balance is deducted, the amount of equity you have in your home is established.
How much can you borrow with a home equity loan or line?
Most lenders will allow you to borrow up to eighty percent of your home's value, minus any remaining mortgage balance. For example, if your home is worth three hundred thousand dollars and you still owe two hundred thousand on your mortgage, you can borrow forty thousand dollars.
Some lenders may allow you to borrow up to ninety percent of your home's value, but these loans generally have higher interest rates and require points to be paid at closing. Points are a percentage of the loan that are added as an additional fee, and are usually limited to one to three percent of the loan.
What are the best reasons for getting a home equity loan?
A home improvement loan is the best use of a home equity loan or line. When you use the proceeds to repair or enhance your home, you are replacing the lost equity by adding to your home's value while creating a better living space for your family.
Paying off burdensome high interest debt can also be productive, as long as the spending habits or events that produced the debt are curtailed or eliminated.
Of course, if you're financially stable and generally responsible with your money, you can go on the dream vacation with your family and create a lifetime of priceless memories.