What Is A Home Equity Line Of Credit?
If you have a home that you've been paying on for several years
you may have a lot of usable money (home equity) right under
your nose? A home equity loan just may be the perfect way to get
your hands on that money to use for paying off those high
interest credit cards, home improvemnets, college tuition, etc.!
Here's an example of how a Home Equity works:
Let's say that your current home mortgage was originally for
$250,000. After several years of paying on that note you now
only owe the mortgage company $150,000. In this example, you
would have $100,000 in equity in your home. Now lets also factor
in inflation and say your current home will appraise today for
$325,000.00. So now your EQUITY is equal to $325,000.00 less the
1st mortgage of $150,000.00 which would then be $175,000.00 of
potential borrowing power!
A home equity loan is a specific type of loan that will allow
you to borrow against that "equity" you have built up in your
home. Actually there are two "types of equity loans" to be
considered. Home equity loans and a Home Equity Line of Credit.
"What's the difference in a Home Equity Line and a Home
Equity Loan?"
A Home Equity Line -
* A line of credit amount established on revolving, variable
rate basis. Only requires a minimum payment amount.
NOTE: Works very similarly to a credit card product with
the minimum payment feature and revolving term.
* Not intended to payoff at set maturity date.
* Intended to utilize the equity in the home, usually to qualify
as a home mortgage interest deduction if qualifies (to be
determined with your tax consultant).
* Not recommended to use to consolidate credit card debts.
* At maturity date, remaining balance is renewed into new home
equity line.
* Can usually be obtained with no closing costs promotions at
lending institutions.(Most do have a prepayment penalty clause
if loan is paid off in short period of time to collect their
costs).
A Home Equity Loan -
* Fixed Term and Fixed Rate (usually 36 months - 180 months,
depending on lender)
* Utilizes the equity in the home, usually qualifying as a home
mortgage interest deduction if qualifies (to be determined by
your tax consultant).
* Can be first or second mortgage loan.
* Pays off in full at maturity date, and can be accessed by
payment book or automatic payment with lending institution.
* Recommended for use when consolidating consumer debts,
especially credit card debt, so that will be eliminated when
loan paid off.
* Can usually be obtained with no closing costs promotions at
lending institutions. (Most do have a prepayment penalty clause
if loan is paid off in short period of time to collect their
costs).
Why would you want borrow more money out of your home? The
number one reason that people take out home equity loans, or
home equity lines of credit, is to consolidate their debts.
Because a home equity loan is a secured loan, the interest rates
are considerably lower than that of credit credits or even
personal loans. So if a person had the average credit card debt
of say $10,000 they could reduce the total amount of their
monthly payments AND reduce how much they owed by taking
out a home equity loan, or home equity line of credit. You would
then use the cash to pay off your credit card debt and reduce
your indebtedness by substanially reducing the amount of
"non-deductible" interest you will pay over the next several
years.
Another great reason for taking out a loan of this type is to
make improvements on your home. Have you been thinking about
remodeling your bathroom, or the kitchen, or maybe adding a
swimming pool to your backyard? A screened in porch, a hot tub,
or studio to your yard or maybe even a sunroom? A home equity
loan is a great way to finance these types of projects.
Your first step should be to talk to your current mortgage
company or your local Bank about your options, but don't stop
there. You will quickly find that there are plenty of Banks and
other lenders who are willing to make you a Home Equity loan or
extend you a Home Equity Line of credit. So you should shop
around for your the best deal - and there are plenty of good
deals out there!