Home Equity Loan: Tapping into the power of your homes equity

2005-11-24

A home equity loan is a way of using the equity of your home to release funds, e.g. in order to pay for repairs or improvements of your house or to pay tuition fees for your children. The equity is the difference between the estimated value of an asset and the claims (liabilities) on that asset. In real estate, the equity that can be utilized in the form of a home equity mortgage is the difference between the market price of your home and your mortgage debt. You can use the money from your home equity mortgage as you see fit and you might also be eligible for tax deductions when you begin to pay interest on your home equity mortgage. The home equity mortgage will be secured by your home and it is naturally important to manage the payments of your home equity mortgage with the same carefulness as you manage the payments of your standard mortgage. Since you can offer the creditor your house as collateral it can be possible for you to negotiate much more favorable terms for your home equity mortgage than for other types of unsecured loans. This is why a home equity mortgage can be a better alternative than credit cards and other forms of short-term loans.

A home equity line of credit is a type of revolving credit where your home is used as collateral for your home equity line of credit. It is common for home owners to utilize their home equity line of credit for large and important payments such as college fees or medical expenses. Since a home equity line of credit is a form of home equity mortgage, your can easily loose your house if you do not use your home equity line of credit wisely and within you means. A home equity line of credit can for instance be a good way of financing home improvements, since home improvements will actually make your collateral more valuable. After applying for a home equity line of credit you will be approved for a predetermined amount of credit. It is common for creditors to calculate the limit of this and other types of home equity mortgages by subtracting your existing mortgage from a percentage of the apprised value of your home. If the appraised value of your home is $ 200,000 and your mortgage is $ 80,000 a standard calculation can look like this: 200,000 x 75% = 150,000. 150,000- 80,000 = 70,000. Your potential credit will be 70,000.

Home equity loans are also described in terms of Closed End home equity loans and Open End home equity loans. With a closed end home equity loan you will receive a lump sum of money as soon as the deal is closed and all the details for your home equity mortgage has been determined. Closed end home equity loans are typically loans with a fixed rate and will be amortized up to 15 years. You will be required to pay a so called ‘balloon payment’ after a certain amount of years; commonly 3, 5 or 7. A balloon payment is a larger payment that is paid at the end of a series of significantly smaller regular payments. Some creditors will allow you to refinance instead of paying off the balance when your balloon payment is due. Refinancing means that you will apply for a new loan that will replace the old loan and this new loan will also be secured by your home. The Open End home equity is the same as a revolving credit. You will not receive a lump sum of money. Instead, you can use he available credit when you find it necessary and is only required to pay a minimum monthly payment.

When you are considering a home equity line of credit you should always compare the conditions to the traditional second mortgage loan. Both Closed End home equity loans and Open End home equity loans are often called second mortgages, but the Open End home equity loan is actually more like a card credit in many aspects. With a Closed End home equity loans you will receive a lump sum of money that must be repaired over a predetermined period. This is not the case with a home equity line of credit. The typical Closed End home equity loan will be paid back in a series of equal payments. When you compare the home equity line of credit with the traditional second mortgage loan you should not only focus on the size of the APR. The APR for the home equity line of credit is only based on the periodic interest rate, while the APR for the traditional second mortgage loan is based on the interest rate combined with points and other extra fees. It is also important to compare the offered terms for your home equity line of credit with other forms of credit before you make up your mind.

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