Home Equity Loans 101

Homeowners looking to borrow a large sum of money may find a home equity loan to be an attractive option. These loans are typically used to fund a major home renovation, college education, consolidate high interest debts or pay off medical bills.

A home equity loan allows a homeowner to borrow money using the equity in their home as collateral. The equity consists of whatever funds were invested in the home at the time of purchase, principal from mortgage payments, improvements done to the house and any appreciation of the house value since purchase.

Advantages

A home equity loan is a secure loan because it is against a homeowner’s possession, and many lenders view them as relatively safe. Borrower’s are more likely to pay when their home is on the line, or in case of default payments a home can be easily seized since it can’t be relocated or hidden.

Not to be mistaken for a Home Equity Line of Credit (HELOC), which is a revolving line of credit with an adjustable interest rate, a home equity loan is a one-time lump-sum loan, usually with a fixed interest rate. Home equity loans typically have a lower interest rate than other types of loans.

Another advantage of a home equity loan is that they are tax deductible. Amounts of up to $100,000 are fully tax deductible no matter what you spend the money on.

Precautions

Before you apply for a home equity loan, it would help to ask yourself first: Do I really need this? Is there no other way for me to acquire the amount of money I need right now? Can I perhaps use my credit card instead? Am I willing to risk my home in case I fail to pay properly? Are my credit reports accurate? Can I manage my payment budget?

If the questions lead you to getting a home equity loan, that’s where you can take the first step.
Be aware, however, that there are scammers who cheat homeowners out of their property. It is important, therefore, to know well who you are dealing with, and that the deal is legitimate – get everything in writing and make sure you understand the terms clearly! You wouldn’t want to lose your prized possession out of your carelessness.

Be aware also of possible fees that may apply to your home equity loan. Some of these are appraisal fees, title fees, arrangement fees, closing fees, etc. Check for possible hidden costs. Like most loans, a home equity loan will have fees of some sort, so make sure you know about the fees that are charged.

It is always important to shop around for the best home equity loan. With the many options out there, take time to ask around for recommendations and advice or look around the Web.

To check what various home equity loan rates will mean for your monthly payments, there are websites that have a home equity loan calculator. Here you can compare offers from various lenders and brokers so that you can get the lowest rate possible.

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