Understanding the Home Equity Loan Process

What is Home Equity?

One of the benefits of becoming a homeowner is the gain of home equity. Home equity is the difference between the value of your property and the balance you owe on the mortgage. The equity built in your home is essentially your money. For example, let’s say you took out a $175,000 mortgage (which for this case is the value of your home). After the down payment and about seven of the fifteen years paying your mortgage, you have $85,000 left to pay on the mortgage. In those seven years, your home has appreciated in value. It is now worth $200,000. The equity you have built would be $115,000. Home equity, after the property is sold, is like money in the bank.

Using Home Equity through Loans

There are times in the life of a homeowner that new financial opportunities arise. Perhaps you are sending your daughter to college and need money for tuition, or maybe you are looking at renting a vacation home for the summer. You may need to build an addition onto the house for a new addition to the family. Whatever the reason, lenders have made available a few loans that allows you to borrow on your home equity. These home equity loans sometimes offer a better value than your ordinary conventional loan. There are two basic types of home equity loans: a closed home equity loan and a home equity line of credit (HELOC). A closed home equity loan works much like a conventional loan in that the money is given up front in its entirety. The result is monthly payments for a duration of time. A HELOC, on the other hand, opens a revolving line of credit for the borrower. While it works much like a credit card, the interest does not compound over time. The lender and borrower agree to a set-borrowing fee with a drawing period. During this period, the borrower can take out at any time the amount of money needed as long as it doesn’t exceed the limit. The borrower only pays back what is taken out. A HELOC gives the borrower the power to dictate cash flow according to his needs.

Benefits of Home Equity Loans

Home equity loans offer benefits that other loans can’t. These benefits usually come in the form of interest. While the interest rates are usually set lower than the fixed-rate conventional loans, they are also tax deductible. The tax benefits with a home equity loan make it a popular choice for those interested in property investment. Because a HELOC is a little more “user friendly,” it is the more popular choice. When searching for your home equity loan, ask your lender about their rates and services. A word of caution, a home equity loan uses the equity built in your home as collateral. In other words, if payments start to fall behind, your house may face foreclosure on account of default.

Whatever the reason, whether making home improvements, paying tuition, or working on property investments, home equity loans offer a good choice to finance such an endeavor.