Home equity loans provide you with greater purchasing power by drawing on the equity that you have built up in your home over time.
Generally, you can borrow up to 100% of the equity in your home, although some lenders will allow you to borrow up to 125% if you have very good credit.
The uses of home equity loans are as varied as renovations, debt consolidation, sending your son or daughter to college, or purchasing a car.
Essentially, home equity loans act like a second mortgage loan. To qualify for a home equity loan, however, you must meet certain income-versus-debt ratio requirements. This may include proving that at least 20% of your home’s value has been paid and undergoing an appraisal.
Once you receive the loan—disbursed as a lump sum—you must make fixed monthly payments just as you would if you had a second mortgage loan. Be aware that home equity loans usually have associated closing costs.
In comparison to the interest rate on a first mortgage or a mortgage you have decided to refinance, home loan interest rates on home equity loans are typically higher, although still lower than the interest rate on a credit card or a conventional bank loan. Yet while home equity loans do not offer the best mortgage rates, the interest may be tax deductible in certain circumstances.
As with a mortgage, a home equity loan can be either a fixed rate or an adjustable rate. A fixed rate will give you the comfort of knowing exactly how much your monthly payments are going to be for the life of the loan; however, an adjustable rate may benefit you if interest rates drop.
One other thing to note about home equity loans: your house serves as collateral for the loan, so if you cannot make the monthly payments, you risk losing your home.
You may also be able to take advantage of your home equity through a cash-out refinance, which allows you to pay off the balance on your mortgage and convert into cash some of the equity that has built up in your home. Refinance rates change all the time, so keep your eye on the current rate in case you decide to do a cash-out refinance or a rate-term refinance. Whether you opt to take out a home equity loan or refinance, mortgage information can always be found for free at Home Mortgage HQ.