Article Presented by:
Ethan Deville
Home equity can be a difficult concept to understand if you have never dealt with home ownership before. Equity is defined as the monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, etc. In simpler terms, home equity is how much house you have earned.
Equity is the difference between what your house is worth and what you owe on it. For example, if your house is worth $120,000 and you owe $100,000, your equity is $20,000. You can get a home equity loan, depending on your credit rating and a number of other factors, for the $20,000 that you have built up in equity.
Each lender will have their own set of rules on how much they are willing to give you for a home equity loan. Regardless of which lender, you think you would like to take a home equity loan with, it is imperative that you closely read all of the fine print of the loan. Some lenders will require a large balloon payment towards the end of the life of the loan. Other lenders may include a number of service fees on the loan, which will cause the overall cost of your loan to be quite high.
It is also very important to review all the terms to see what kind of charges would be incurred if you are late on a payment. It is best to have your home equity loan paperwork reviewed by a trusted friend or financial advisor that deals with these type of financial transactions on a regular basis, to make sure that you are getting what you expect in the loan terms.
A home equity loan is a closed-end loan that can have a fixed term, a fixed rate, and fixed monthly payments or it can carry an adjustable finance charge rate that fluctuates with a federal interest rate. The amount of the loan is usually made available in a lump sum. This is quite different from a home equity line of credit (HELOC).
A home equity line of credit is a good option if you need a smaller amount of money available for a shorter period of time. A HELOC gives you the option to withdraw funds from an equity account when you need them. If you repay the amounts that you are borrowing in a reasonable period of time you will pay lower interest and fewer fees than you would with a home equity loan. You can use this revolving credit at any time and make payments only when there is a balance due. You will have a lower finance rate and a great emergency source of funds. Your house serves as security collateral for both a home equity loan and a HELOC.
If you need a very large amount of money to pay a big expense, as in the examples below, then a home equity loan is probably the best choice. If you simply need some extra funds each month, or an emergency source of money, then a HELOC might be your best choice.
Once you have found a good home equity loan there are a number of items for which you can use this loan. Many people these days are finding themselves in credit card debt, due to credit card companies offering more credit than people can really afford. It is very easy for someone to get credit cards and to charge things on them; it is much harder to pay them off. Credit cards also charge a large amount of interest and high fees for late payments. If you find yourself with credit card debt and never seem to get ahead on paying off the balance then a home equity loan might be the solution that you have been looking for. With a home equity loan you will know what your monthly expenses are and have a plan to pay down your debt at a fixed interest rate.
A home equity loan can also be used for paying for college expenses. College is very expensive these days and a home equity loan can help people that are on tight budgets be able to afford the expenses of college. Many people find themselves in the trap of making just enough so that their children do not qualify for financial aid, but they really do not have the extra income to pay for tuition.
A home equity loan can also be used for paying for needed home improvement projects. Home improvement projects can be quite costly and paying for them can be quite difficult. A home equity loan that offers good interest rates can help to pay for a new roof or a room addition.
No matter what you decide to use your homes' equity for, make sure that you go with a trusted lender that has a good reputation. Be sure to check the credentials and history of the company that you are getting your loans with to make sure you are dealing with a quality organization.
About the Author:
Ethan Deville is a finance writer. PersonalHomeLoanMortgages helps customers find national/local mortgage brokers, calculate monthly home loan payments, and view local mortgage rates. Find Home Loan Mortgage Lenders: http://www.PersonalHomeLoanMortgages.com
