Home Equity Loans
A home equity loan -- sometimes called a 'debt consolidation loan' or 'home improvement loan' -- is a loan against the equity in your property and guaranteed by your property. Your equity is the difference between what your house is worth and what you owe the bank. For example if your home could be sold on the open market for $100,000 and your mortgage balance is $75,000, your equity is $25,000. You can borrow cash against your equity by giving the bank a lien against your property. That is, if you don't pay back the money you borrow, the bank can take your house to collect the debt. Most banks will loan you up to 80% of your equity. In our example, most banks offering home equity loans would allow you to borrow up to $28,000. In some markets where banks expect property to rapidly go up in value, some banks will loan property owners up to 100% of their equity.
With some home equity loans, the lender gives you a lump sum -- they give you all of the money when you get your loan. Other home equity loans can be set up as lines of credit -- you've been approved to borrow the money, but you take only what you need when you need it. You have the money available, but do not have to pay interest until you actually borrow some of it. Many homeowners find that a home equity line of credit is good insurance against emergencies. It doesn't cost anything (except maybe an application fee) but gives you flexibility should you need money in a hurry.
Depending upon your situation, you may be able to deduct some or all of the interest you pay on a home equity loan from your income tax. If you are considering a home equity loan, you should consult with a lawyer or tax advisor to determine if you are eligible to deduct the interest.
The advantage of a home equity loan is that it is usually much less expensive than other types of financing such as credit cards -- particularly if you get to deduct the interest. But, remember, you have pledged your house as collateral -- if you can't make the loan payments, the bank will take your house.
You need to shop around before settling on a home equity loan. Lenders offer a wide variety of terms & interest rates
for home equity loans. Home equity loans are a very competitive business - don't hesitate to ask if the lender can do better.
If you're working with a mortgage broker, there may be overages and
the broker may be willing to take less profit to get the loan. There are several websites that will let you submit a home
equity loan application to several banks. The services listed below are all free, there's no credit check and there's no
obligation:
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Really Great Rate has a very simple
sign-up form that lets you request a free quote. You will get free quotes from up to four lenders.
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America’s
Lending Partners
works with borrowers who have less than perfect credit. They also get you free quotes from up to four lenders.
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The Loan Page was recently featured on
MSNBC. They will get you up to four free quotes, even without perfect credit.
More information is available free from the Federal Reserve Board. They offer a booklet called " What You Should Know About Home Equity Lines of Credit" available here.