Home Equity Basics

Understanding home equity loans or line of credit can be your answer for remodeling your home, paying off credit card debt, helping your child with tuition funds, or just desire a cash reserve in case of an emergency. If you own your home, you can receive these types of funds with a home equity loan or line of credit. However, of course you should do some research before you make your final decision.

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A home equity loan allows you to borrow usually up to 80% of the value of your equity. This type of loan is a secured loan because you are using your home as collateral for the loan. Most lenders will give much better interest rates for homeowners that are using their own equity in order to apply for a loan. However, you must understand that the home equity loans are not the same of new home mortgage loan, which allows you to pay off your existing mortgage. If you default on your loan payments with an equity home loan, you can lose your home, since you are using it as collateral for the loan.

Home equity loans

These are sometimes referred to as second mortgages and they are normally for a certain amount of money and must be paid back over a fixed time period.

Normally, a home equity loan gives you the full amount you borrow at the beginning of the loan and has a fixed interest rate. Payments are made monthly for the life of the loan

Home equity lines of credit

These allow you to borrow what you need when you need it such as updating your kitchen, and repaying it. You will be approved up to a certain amount of money. Normally, with a home equity line of credit, you will receive checks or a debit card that you can use if you have an available balance to access your funds. Most HELOCs have a variable interest rate. Monthly payments vary according to the charges in your outstanding balance and the interest rate.

There are several different types of home equity lines of credit so you will have to ask questions and do a bit of research to ensure you apply for the one that you need. Some of the questions you should ask include:

• When and how often is the interest rate adjusted?
• How much will the interest rate change with one adjustment?
• Is there an adjustment cap?
• What is the lifetime cap?
• What is the borrowing period?
• Can the borrowing time be renewed?
• Are the monthly payments only interest or will principal be included as well?
• Will there be a balloon payment?
• Can the loan be converted to a fixed rate?

One thing to remember, some lending companies may cap the monthly payment but not the interest adjustment.

There are costs involved just like there are with all types of loans. They are pretty much the same as you will see when you are applying for any mortgage loan and they include:

• Application fee
• Property appraisal fee
• Points (where a point equals 1 percent of the amount of the loan or lending limit)
• Closing costs (e.g., attorney, title search, and mortgage preparation/filing fees)
• HELOCs may impose an annual maintenance fee and/or a transaction fee for every withdrawal

Before you make your final decision on either a home equity loan or a home equity line of credit be sure to compare different lending companies. Fees, interest rates and other costs should be considered between the lenders.

Deciding which is better for you just takes a bit of research. If you know exactly how much money you will need for a certain purpose, then a home equity loan would be the best route to take. However, you may need the line of credit if you are not sure what the expenses will be to remodel your home or whatever the reason is you need the credit line.