Home Equity Loan

Home Equity Loan Basics

Most people purchase a home as a place to live, but homes can also serve as an investment. This is because homes are constantly increasing in value. As you make monthly mortgage payments, you decrease the amount owed on the principal. The result is equity. The amount of equity that you have built in your home depends on how much you still owe on the house and how much the house is currently valued at. For example, if your house is appraised at $100,000 and your current mortgage balance is $60,000, then you have $40,000 in home equity. Your home equity can be withdrawn at any time. All you need is the proper loan.

Home equity loans are similar to a second mortgage. You borrow money from a lender, using your home as collateral. You must then pay back the cash that you borrowed. The time frame that you have to pay back the money depends on the terms of your loan. Some loans have terms as short as one year, while others have terms that last up to 20 years.

In general, equity loans are relatively easy to obtain, and is often easier to qualify for than a first mortgage. This is because you already own the house and carry most of the risk. If you default on your home equity loan, your lender can seize your home and sell it to recoup the loan amount.

Home Equity Loan vs. Home Equity Line of Credit

Home equity can be tapped into in two ways that are often confused: loans and home equity lines of credit. Though both methods of financing use the equity that you have built up in your home, they work a bit differently. Home equity loans are lump sums of cash that are given to the homeowner upon approval. Home equity lines of credit, on the other hand, are revolving lines of credit that work similarly to a credit card. Though you will be approved for a specific amount that can be withdrawn at any time you wish, you will only make payments on the money you use. If you never use any of the funds that are available to you through your home equity line of credit, you will never have any payments.

Though both methods of financing have their advantages, there are also drawbacks to each. Before deciding between the two avenues, you should do some research on each option to determine which one best fits your financial situation.

Home Equity Lenders

There are many different lenders who now specialize in home equity lending. The lender that you choose will be one of the most important decisions that you can make during the process. Not all home equity lenders are legitimate and choosing the wrong one could be devastating to your finances. To make sure you choose a reputable lender, you will need to do your homework.

Start by contacting traditional lenders as well as online lenders. Ask for free rate quotes from several lenders and then contact the Better Business Bureau to check for any complaints on these companies. Once you have narrowed your choice to three lenders or less, begin making comparisons between the interest rates, lending fees, and loan terms and conditions that are being offered to you. Choosing a lender who provides low interest rates and reasonable lending fees can save you hundreds or even thousands of dollars over the life of your home equity loan.