|
A home equity loan or line of credit is a means of borrowing money while using the equity that you have in your home as collateral. Usually, the more equity that you have in your home the greater the amount of loan that you can acquire.
First, the collateral is something that you use to secure a debt. This is a guarantee that the lender will, at least in part, get their investment back if the borrower fails to repay the loan. In the case of a home equity loan or line of credit, the house will be taken if the debt is not repaid.
Secondly, the equity is how much acquired value that you have in the property or the difference between what the present value of the property is minus what you still own on your mortgage.
If the actual value of your house is $100,000 and you made a down payment of $20, 000 at the time of purchase, your equity at the time of purchase is $20,000 minus any costs for loan processing etc.
Another scenario would be if you bought a house with a $100,000 value at the time of purchase and paid enough up front to get a $20,000 equity at this time but kept paying on the house for 5 more years and have actually paid $12,000 more on the original mortgage debt not the loan interest then your paid equity is actually $32,000. If the actual value of the property has increased 10% of the original purchase value, then you can add $10,000 to the equity line for a total of $42,000. This $42,000 is the actual equity that you now have in the property.
A home equity loan or line of credit is a second mortgage that makes cash available for your use on other things. These are usually loans that will be used on home improvements, debt consolidation, educations, trips, and various other expenses.
Second home mortgages or refinancing come in two categories, home equity loans and home equity line of credit. Both of these loans are secured by the property and are normally for a shorter term than the original mortgage. Most home mortgages are for terms of 20 to 30 years while the home equity loans and line of credits are usually 15 years or less. Sometimes they are for a longer term.
A home equity loan is a lump sum borrowed all at one time and is paid off according to the terms of the agreement. The required payments are the same every month but a greater amount can be paid to cut down on the amount of interest paid. Normally the interest rate is the same over the whole term. It is important that you check the rates at a lot of sources. This will give you an idea of where the best rate lies. For larger amounts of money like the equity loans, this is very important since the term is long and the interest can amount to a lot of money.
Always remember that in most loans, any amount of money over the required payment goes solely on the principal and not the interest. If this is possible for your, the loan can cost you a lot less money in interest. This is also true with the home mortgage. Sometimes it is easier to go for as long a term as possible and pay more than the terms each month. A lot more money comes off of the principal at the beginning if the payments are handled this way. This reduces the interest in the long term.
A home equity line of credit or HELOC is more like a revolving credit. This money can be used over and over for a certain amount of time with the payments and interest being set by the amount that you owe. This is somewhat like a credit card but your home is used as the equity.
You have to be careful with this type of loan since you could be paying on the interest only and not the principal. You could stay in debt for a long time yet not have the loan paid off.
A variable interest rate comes with the line of credit and the payments can vary with the interest rate.
During the draw period, you can make a lower payment normally being required to pay only the interest. You still have the option to pay more than the interest each month.
During the repayment period, you must be paying part of the principal along with the interest. You can still be adding debt for a certain period of time.
The draw period and repayment period varies with the lender. There are a lot of different terms available as with the interest rates. Whatever the terms, the remaining debt must be paid off when the terms expire or the property is sold. This hold true for the original mortgage also.
Home equity loans or lines of credit can be very beneficial is handled intelligently and used in the correct manner but the results can be very devastating if handled recklessly.
C. Oxford
GetawayCrafts
|
