Checking Out Home Equity Loan Facts

| November 5, 2011

Your house is a very important part of your life. Not only does it provide shelter from the elements, it is also a good investment. The more that you know about this investment, the better you can take advantage of it. Here are some home equity loan facts to consider.

What it is

Suppose your home is currently worth 180,000. Your mortgage balance might be $120,000. Your equity is the difference. It is $60,000. This amount can be used as collateral for borrowing money. These types of loans are also called second mortgages. This is because they exist along side of your original mortgage.

Using your home value

Second mortgages usually carry a low interest rate. They are considerably less than many others. This is because you are providing collateral. You can use the money for anything that you like.

Interest can be an important tax deduction. However, you must be able to itemize your deductions. If you can, this can make this type of borrowing a worthwhile venture.

All borrowing carries some degree of risk. However, these ventures have considerable risk. Your home is the collateral. It is important not to default. You could have a lien placed on your home. You may lose the home to foreclosure.

Terms

Try to get as short of terms as you can afford. There are several reasons for this. You will pay much less interest this way. This means saving a lot of money. It will also tie up your home collateral for less time. In the future, you can borrow on your home again.

Interest rates are higher than first mortgage rates. This is usually the case. However, this depends when you get the money. Your second mortgage may have a lower interest than your first. This happens if interest rates are high, when you first buy the house. You might pay six percent on your home in 2002. In 2010, interest rates may be much lower.

Lines of credit

Most second mortgages involve money in one lump sum. There are also lines of credit. Your original amount is determined. However, you are only charged for money that you take out. It is similar to a charge card situation. Interest rates are often higher with lines of credit.

Lines of credit do have some advantages. You may not wish to borrow all of the money that is available. You can use it, as it becomes necessary. This way you do not have go through the borrowing process, all over again.

Fees

You will find several different fees. You will be charged for an appraisal. There will also be points. Points are percentage points. Suppose your amount is $30,000. You may need to pay one point for a fee. This comes to $300. Expect things like fees for obtaining your credit report. There may also be several different paperwork fees. Find out ahead of time, what the closing costs are.

Summary

Knowing home equity loan facts can help you with financial decisions. This money can be used to finance many different things. You may be able to get a tax deduction. Try to get as short of terms as possible. This will save money. Check into lines of credit, too. Expect a lot of fees. Make sure that you know what they all add up to.

Category: Home Loan

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