Homeowners who obtain a home equity loan or line of credit use the accrued equity as collateral to secure the loan. When the housing crisis occurred, millions of homeowners lost a substantial amount of home equity because of the dramatic reduction in real estate prices.
To determine the amount of available home equity, lenders calculate the outstanding balance owed on first and second mortgages and subtract it from the appraised property value. The difference between the two amounts will determine how much money borrowers qualify for when obtaining a home equity loan.
There are many factors to consider before applying for a home equity loan or line of credit. Perhaps the most important is what will happen when borrowers default on their home equity loan payments. By using home equity as collateral for secured loans, homeowners can potentially place their home at risk for foreclosure.
Most homeowners have every intention of paying off home equity loans, but when life throws a financial curveball even the best laid plans can fail. It is best to research all types of available loans to determine if another choice is available.
Many people use home equity loans to pay off credit cards and unsecured debt such as student loans and medical bills. In cases where borrowers have a substantial amount of debt, this might be a good decision. Credit card companies charge a higher rate of interest than is assessed against home equity loans. By taking out a home equity loan, debtors can potentially save thousands of dollars in interest alone.
Some people elect to use home equity loans to consolidate college loans or refinance mortgages. Several options exist for college loan consolidation without the need of using real estate as collateral. These include consolidating student loans through federal programs available through the Department of Education or private programs offered through SallieMae.
Home equity lines of credit might be a better choice for homeowners requiring funds to pay off outstanding debts or to make home improvements. Often referred to as HELOC loans, borrowers are given a line of credit which can be used on an as-needed basis. Lenders establish the line of credit amount based on the amount of available home equity and borrowers' credit history and FICO score.
Borrowed funds can be repaid in monthly installments or one lump sum payment. Homeowners are only required to pay interest assessed on the HELOC loan during the first ten years. Afterward, they enter into the 'draw' period and must pay the outstanding principal and interest.
Home equity line of credit is a good choice for borrowers in need of funds for home improvements, student loan consolidation, real estate investments or paying off unsecured loans.
Borrowers thinking about obtaining a HELOC loan should also consider obtaining a traditional second mortgage home loan. Second mortgages allow borrowers to obtain a fixed amount of money that is repaid over a fixed amount of time.
One of the most trusted resources for obtaining accurate home equity loan information is the Federal Reserve Board website at FederalReserve.gov. Visitors can learn what to look for when shopping for a home equity loan; use home equity calculators to determine the true cost of entering into home equity loans or line of credit; and understand how HELOC and home equity loans are repaid.
Before you head over to the Federal Reserve Board, we encourage you to review our home equity article library to obtain additional information and resources. New articles are added to our personal finance library, so take a moment to subscribe to our mailing list to receive notification when new home buying and refinance information is available.
Published on May 13, 2010 at 03:42 AM