Your Home Equity Loan
What are Home Equity Loans?
Home equity loans are typically loans that utilize the equity in your home after the traditional first mortgage. For example, a borrower may purchase a home for $100,000. The first loan will go up to $80,000 based on an 80% Loan to Value qualifier set in place by the bank.
The borrower may then get an additional loan, which is the Home Equity loan, for $20,000, or the remaining 20% of the homes value. The Home Equity is usually based off of what is called Prime Rate. This is a rate that banks use to lend money to one another and typically the payments are interest only, so in many cased they are very affordable.
The Value of Home Equity Loans
Home Equity loans are considered to be some of the cheapest money around. By that it is to say that they have the lowest interest rates. Many Home Equity loans today are between 4 and 5%, by comparison a low credit card may be as 7%. The only cautionary tale that one needs to consider is that home equity lines do fluctuate. In the current housing market, these loans are very inexpensive, but over time the cost could go way up as interest rates begin to rise. Some home equity lines have a feature allowing the borrower to fix a portion of their balance, if not all of it, and convert it to a fixed mortgage. This is usually at a higher rate than the current prime rate, but the borrower wins if the rate adjust dramatically upward. Home equity lines can also be paid down, or paid off without penalty. Nor will they close simply because the borrower paid them down.
Using a Home Equity Loan
The uses for Home Equity loans can very virtually unlimited. Homeowners can use them for home repair, upgrades, large purchase such as cars, boats or other such personal items; they can be used to pay off credit card debt or even to invest if one so chooses. Parents may use the home equity line to pay for their childrens education, or family vacation. Often times homeowners can use a home equity loan to upgrade their current home by replacing a kitchen, adding a room or landscaping the back yard, thereby increasing the value of their home. Once the value increases, they refinance their first mortgage to pay off the Home equity, then subsequently take a new home equity loan.