Home Equity Mortgage Loans

How Home Equity Mortgage Loans Work

When you combine your down payment and monthly mortgage payments with your home’s appreciation over the past few years, you are probably sitting on a decent nest egg. Home equity mortgage loans let you access the money invested in your home without taking the drastic step of selling the house. Like your first mortgage, the interest is often tax-deductible, something you will not find with most other loans.

A home equity loan, also called a second mortgage, is based on how much money you have invested in your home and what it appraises at. This figure can be up to 125 percent of the home’s value.

To determine how much you can borrow, you first need an appraisal of your home. Let’s say your home is worth $150,000. You can borrow against 125 percent of the home, or $187,500. So, if your existing mortgage balance is for $125,000, you may qualify to borrow $62,500 by taking out a second mortgage.

Keep in mind that your home equity mortgage loan will be affected by any liens on the property and will reduce the equity in your house. You should plan to hold off on selling the house until the equity loan is paid off or you will risk losing money, especially if you have mortgaged more than the house is worth.

Not all states or all mortgage lenders offer the full 125 percent equity loan; so, just like with your first home mortgage, you will need to shop around to find the best deal for your situation.

Using a Home Equity Mortgage Loan

One of the best things about home equity mortgage loans is the money can be used for anything you want, unlike construction or home improvement loans that have to be applied to your home. Although people apply for equity loans for many reasons, some of the most popular include:

Debt Consolidation

Since the interest rate on a home equity loan should be a lot less than the rates on most credit cards, you can pay off your cards and save money every month. Make sure you use this as an opportunity to get your credit back on track. Many people who use home equity to pay off their credit cards keep using the cards paying them off. Once you have tapped into your home’s equity once, you cannot do it again until the equity loan is paid off. Your best bet is to get rid of the majority of your credit cards after you have paid them off.

Education Expenses

The rising costs of higher education make it difficult for anyone to pay for college, whether you are putting your child through school or you are going back for your own degree. Using a home equity mortgage loan is a popular option for homeowners who may not qualify for standard education loans and grants but have a lot of equity in their home.

Home Improvements

Using the equity in your home to upgrade your kitchen or add a new bedroom is a win-win situation, since you will be using your home’s money to increase its value. Just make sure you apply for the home equity mortgage loan and make the improvements a few years before you plan to sell the house. If you still owe on the loan, you may not get as much out of the house when you sell it.

Major Purchases

The freedom of an equity loan means you can use the money to buy a car, go on a trip, or pay medical bills. Since the interest may be tax-deductible and rates are lower than most other loans, you can save hundreds of dollars, but be careful not to extend yourself too far. The payments on an equity loan continue long after the trip is taken or when the car is no longer valuable.