All About Home Equity Loans

When thinking about home equity loans it is important to realize these are loans that allow homeowners to borrow money using their primary residence as collateral. They are second mortgages in that the amount secured by the collateral (home) is secondary to the primary mortgage.

About Home Equity Loans And Primary Mortgage Loans

Both the primary mortgage and home equity loans carry the same obligations. While home equity loans are second mortgages, both loans are made against the value of the homeowner's property. In the event you do not pay (default) on your obligation, the property is subject to foreclosure. The primary holder of the mortgage has first claim on the assets in the case of default. The home equity loan mortgage holder lays claim to whatever is left.

Home Equity Loans Carry Higher Interest Rates


Due to the increased risk (the fact that the holder of the second mortgage or home equity loan cannot recoup their money until after the primary mortgage holder is repaid), home equity loans carry higher interest rates than primary mortgages. Homeowners may wish to consider refinancing into a new first mortgage and add some principal with cash-out option, rather than paying higher interest rate on a home equity loan.

About Home Equity Loans And HELOCs

In a home equity loan, you take a lump-sum payment and repay over the terms of the loan in a fixed interest rate. A home equity line of credit (HELOC) permits you to have a line of credit and you only pay when you use the money. If you need a large amount of cash from the equity in your home all at once, a home equity loan is probably the better way to go. If you are making home improvements but will stagger them over time, a HELOC may be a better strategy.

Amount Available In Home Equity Loans


Calculating the amount available for home equity loans depends on the difference between what you currently owe on your home and what it is worth in today's market. If you have a home worth $500,000 and owe $300,000, your potential home equity available is $200,000. If, however, you owe $500,000 and your home is worth $200,000 in today's market, you have a negative equity of $200,000 and you will not qualify for a home equity loan. There are also some state laws which limit the amount you may borrow against your home.

Home Equity Loans Available For Any Purpose

If you qualify, you can use a home equity loan for any purpose: for debt consolidation, medical expenses, planning for the future, home remodeling and other expensive items or projects. Before you jump into a home equity loan application, however, determine exactly how much you need and whether there are other ways to obtain it rather than potentially jeopardize your primary investment (your home).

About Home Equity Loans: Ability To Pay Requirement


Even if your home equity is sufficient to qualify for a home equity loan, you also need to be able to make the loan payments. Budgeting is necessary before you borrow. First, look at what your current household financial obligations are. Then determine what your home equity loan monthly payment will be. If you feel comfortable with that risk, a home equity loan may be right for you.

Credit Scores Important

Your overall credit history and score (FICO) are also prime considerations when you apply for a home equity loan. While you may be able to obtain a loan using your home equity if you have bad credit or scores of 500 to 600, you will pay higher interest rates than if you have stellar credit history and 750 to 800 FICO scores.

Tax-Deductibility for Home Equity Loans


In most cases, another plus about home equity loans is that they may be tax-deductible on your federal income tax return. Check with your tax advisor for details.