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What Are Home Equity Loans?
Home equity is the difference between the market value of
your home and what you still owe on the mortgage. So if your
house is valued at $300,000 and you still have $260,000
outstanding on your mortgage, your equity would be $40,000.
Home equity loans enable you to borrow against that equity.
These loans are also known as second mortgages because they
are a second loan (the primary mortgage being the first)
that uses your house as collateral.
How Much Can You Borrow?
With most home equity loans you can borrow anywhere up to
85% of the amount of your home equity. For the case above,
with $40,000 in equity, the homeowner could borrow $34,000.
Some lenders have more generous options, even offering to
lend 100% of the amount of equity in your home.
How is a Home Equity Line of Credit Different?
A home equity line of credit (HELOC) is much the same as a
standard line of credit, but it uses your home's equity for
security. With a HELOC you can typically borrow up to 90% of
your home's equity. With $40,000 in equity, you could obtain
a HELOC for $36,000.
With a HELOC, you do not necessarily have to use all of the
credit at once. You can use it as needed and pay back what
you borrow, just like a standard line of credit.
On the other hand, home equity loans are one-time, lump sum
loan. If you need more money, you'll need another loan.
The general guideline is that a HELOC is best for those who
need access to varying amounts of money for ongoing
expenses, whereas a home equity loan is better suited to
those needing a specific amount for one large expense, like
a home renovation.
What About Interest Rates?
Home equity loans typically have fixed interest rates, while
HELOC rates are variable. The interest rates for both are
typically pegged to an institutions prime rate, and are
often significantly lower than those charged for vehicle
loans, credit cards and personal loans.
What is Mortgage Refinancing?
With refinancing, you pay off your existing mortgage and
obtain a second mortgage for a lower interest rate. With a
?cash-out? mortgage or refinance you can borrow more than
what you owe on your mortgage. You can then take the extra
money and use it for expenses like tuition, home
improvements and so on. Refinancing may include costs for
mortgage fees and prepayment penalties.
What are the Pros and Cons?
On the plus side, home equity loans provide low-cost credit
for important expenses. In extreme cases, the risks are that
the home market slows and you end up owing more than the
value of your home, or that you overspend and default, which
means the loss of your home.
For many people the pros outweigh the cons. To be sure if a
HELOC or loan is right for you, it is best to consult with a
mortgage professional. |
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