| Home equity loans are a popular way to access the cash you need for major expenses such as college education, home improvements or the purchase of an automobile. Here is what you need to know if you are considering a home equity loan.
Tip 1. Know What Home Equity Is
The amount of equity in your home is determined by subtracting the current value of your home (what it is worth) from your outstanding mortgage debt. Bankrate.com provides the following example:
Original Purchase Price: 200,000
Original Loan Amount: 180,000
Down Payment/Equity: 20,000
Five Years Later
Original Loan Amount: 180,000
Principal Paid: 13,000
Outstanding Debt: 167,000
Home’s Appraised Value: 300,000
Outstanding Debt: 167,000
Home Equity: 133,000
Tip 2. There Are Two Ways to Access the Equity in Your Home
Home owners can tap into this money using home equity loans. The entire loan amount is disbursed in one lump sum. Once it has been repaid the debt is discharged. Your home serves as collateral for what is essentially a second mortgage. These kinds of loans generally carry fixed rates and shorter terms than first mortgages.
Home owners that need more flexibility may want to consider a home equity line of credit (also referred to as a HELOC). A home equity line of credit lets you tap into your home’s equity on an as needed basis. Much like a credit card account, this type of home equity loan allows you ongoing access to your equity funds. For example, if your line of credit is $5,000.00 and you use the entire amount, you can use the funds again as you repay them. As with a home equity loan your home serves as collateral.
Home equity lines of credit have two phases:
- The draw period – the period during which home owners can access funds from their home equity line of credit. The home owner must make minimum payments, which will vary according to interest rates and loan balance, each month.
- The repayment period – funds are no longer accessible to the home owner during this period. The focus shifts from accessing the funds to repaying them.
Tip 3. Bad Credit Home Equity Loans Are Available for Homeowners with Credit Challenges
Even if you have had late or missed payments it is still possible to get a home equity loan or home equity line of credit. Because such loans are secured by your home, lenders anticipate that they will assume less risk.
Although bad credit home equity loans are available, homeowners will have to do a little leg work to get the best rates. Home equity loan rates come in various stages and are usually dependent on your finances, your credit and your payment history. It is also a good idea to review your credit report for any errors or outdated information. Even if this small step only boosts your credit score by a few dozen points you could save thousands of dollars over the life of your loan.
Tip 4. Using a Home Equity Loan Calculator Can Help You Get the Most Affordable Loan
Home equity calculators can be a wise financial tool for home owners. Using this tool can help you:
- Determine if a home equity loan or home equity line of credit is best for you.
- Determine if borrowing from your home equity is a good move.
- Determine the best course of action for paying down debt.
- Choose the most cost effective loan options.
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