Home equity refers to the difference between the outstanding mortgage balance and current market value of your home. Each time you make a home loan payment, your home equity increases. Depending loan payment history, credit score, and amount of accrued equity, homeowners can borrow money against their property for home improvements, college tuition, and other major expenses.
Before using home equity as collateral for a second loan, it is wise to understand the advantages and disadvantages of this lending practice. Many homeowners use their accrued home equity as a quasi savings account by obtaining a home equity line of credit or HELOC loan. While there are benefits of having an open line of credit for unexpected emergencies, it is important to realize home equity loans can place your home at risk for foreclosure.
Home equity lines of credit are similar to credit cards in that borrowers are provided with a set amount which they can borrow from when funds are needed. For example, borrowers obtain a $50,000 line of credit and require $10,000 for home repairs. The remaining $40,000 can be used as needed. Borrowers only pay interest against borrowed funds. Each time borrowers make a payment toward their HELOC account, they increase the amount of available funds.
Funds borrowed from home equity lines of credit incur variable interest rates. Borrowers must account for variables when borrowing funds and strive to obtain the lowest available rate. During the first ten years, homeowners are only required to pay interest charges against their home equity credit limit. Afterwards, they enter into the "draw" period and are required to pay outstanding principal and interest.
Home equity loans are installment loans where borrowers pay a set amount each month. When borrowers obtain home equity loans they are given a specific amount of money which must be repaid in installments or in one payment. Most lenders charge a fixed rate of interest and establish fixed payments for home equity loans.
Borrowers who need funds for major home improvements, real estate investments, college loan consolidation, or to pay off credit cards should consider utilizing a home equity loan. Borrowers requiring short-term financing or to cover the cost of unexpected emergencies should consider a home equity line of credit.
Homeowners might be subjected to application, appraisal and broker fees to obtain home equity loans or lines of credit. At minimum, borrowers will be required to pay recording fees and annual fees against home equity credit lines.
The biggest mistake homeowners can make when obtaining home equity lending is to borrow 100-percent of accrued equity. It is important to consider the long-term effects. If there is no equity in the home, there will be no profit when it comes time to sell the property or to fund retirement. Make certain you can easily afford the extra payments and strive to repay borrowed funds as quickly as possible.
It is always smart to obtain advice from a financial planner before placing your home on the line. If you become delinquent on home equity loans or HELOC accounts, the bank can commence with foreclosure even if you have never missed a home mortgage payment.
We encourage you to learn more about the pros and cons of entering into home equity loans by perusing our personal money management article library. Discover insider-secrets and resources which can assist you in making the best financial decisions. Take a moment to subscribe to our mailing list by entering your email address in the subscription box on the right sidebar. Subscribers receive instant notification when new home buying and refinance information is published.