Article: Home Equity Loans and Their Uses If you are retired or simply need extra money, and own a home, you may be able to get the cash you need by accessing the equity in your home. Home equity financing uses that equity to secure a loan. For this reason, lenders typically offer better interest rates for this type of financing than they do for other, unsecured types of personal loans. Ready to Apply? Typically, you'll be able to borrow an amount equal to 80 percent of the value of your equity. Home equity financing can be either a loan (often referred to as a second mortgage) or a line of credit. If you are living on a fixed income and have no other liquid assets, this form of borrowing can be risky. If you fail to make timely mortgage payments, you can lose your home. There may be better options available to you.If you need a loan, especially for a large purchase, home equity is an excellent source of funding. The equity in your home secures the loan. If your home is already fully encumbered by a first mortgage or other liens, then it is unlikely that you will qualify. You should be absolutely certain that you will have sufficient monthly income to service the debt over the life of the loan. Once you have received a disbursement of cash from the lender, you will be expected to begin making regular monthly loan payments within 30 to 60 days. You must continue to make payments until the outstanding balance is paid in full. If you are unable to make the payments, the lender can foreclose (take) your home to satisfy the debt. If this is not a problem, the using your home's equity is a great idea. There are a couple of primary advantages to using home equity. 1) Conventional home equity financing is readily available from most mortgage lenders: That is, most banks, credit unions, savings and loan associations, and other mortgage lenders offer home equity financing. It's easy to shop for. 2) With a line of credit, you have convenient access to loan funds. Most home equity lines of credit are accessed with checks or a credit card. This makes access to the funds easy and convenient. You present the check or card in the same manner that you would present any other check or card. The lender extends the funds and adds the amount to your principal balance. (Note: Home equity loans do not have this feature. When you obtain a home equity loan, the lender transfers the entire loan amount to you at the loan closing. When you obtain a reverse mortgage, you typically receive monthly disbursements in a fixed amount. 3) Generally, interest payments on loans secured by your home are tax deductible, but there are some limitations. Talk to your tax assistant or a CPA. 4) Interest rates on home equity loans/lines are typically much lower than traditional credit cards and personal loans, making overall purchases and interest paid much cheaper. On the other hand, there are some tradeoffs 1) Your home is at risk: Whenever you post your home as collateral, you take the risk of losing it in the event of default.Technical Note: Holders of home equity loans and lines of credit can foreclose and sell your real estate in the event of default. However, they are obligated to satisfy the first mortgage holder's lien and pay foreclosure costs before taking any sale proceeds to satisfy their own lien.2) You may have to pay closing costs: As with most transactions involving real estate, a mortgage closing must be conducted to finalize your home equity loan/line of credit. You may be required to pay closing costs, which include points, application fees, filing fees, and up-front costs. All such costs increase the expense of borrowing money.3) Conventional home equity financing does not have deferred repayment terms: Unlike a reverse mortgage, a home equity loan or line of credit does not allow for deferred repayment. You are not permitted to wait until you sell the home, until you die, or until some other event to repay the outstanding balance. You must begin making payments immediately. If you fail, you risk losing your home.4) You may become liable for more than what your home is worth: If the balance of your home equity loan or line of credit exceeds the value of your home, you or your estate may remain liable for the entire outstanding balance. In contrast, if the outstanding balance of your reverse mortgage exceeds the value of your home, you or your estate will only have to repay an amount equal to the value of the home.5) Undisciplined borrowers may have trouble paying down principal on home equity loans/lines: Home equity loans are designed to be paid off over a fixed period of time. Home equity lines of credit, like credit card agreements, require only that the borrower make a minimum monthly payment. Some require the borrower to pay only monthly accrued interest. If you are tempted into paying only the minimum monthly payment, your principal balance could remain outstanding for an unreasonably long period of time. This results in additional interest expenses and prevents you from regaining the equity in your home.6) Home equity lines of credit may have minimum advance requirements: Many home equity lines of credit require that you take advances in predetermined minimum amounts. For instance, you may not be able to obtain an advance on your line of credit for less than $1,000 at a time. This may be inconvenient if you are traveling and need to pay for an unexpected $500 car repair. (If you obtain a traditional second mortgage, all funds will be advanced to you up front.) | 