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A Home Equity Loan - Is It For You?
Home equity loans are often touted as being the solution to so many things - giving you access to money for home repairs or improvements, a way to consolidate debt, finance a sudden family emergency, or even as a way to start an investment portfolio. There's a lot to think about, though, before you go and sign up for the first home equity loan you see.
A home equity loan is like a second mortgage on your home. If your home is currently worth $130,000, and you have a mortgage against it for $70,000, then you have $60,000 of equity available. Some home equity loans may allow you to borrow up to 80% of your home's value, others may go higher in special circumstances. In this example, you would be able to borrow another $34,000 as a home equity loan and still have only borrowed 80%.
So the first step is to get a reasonably good idea of what your home is worth on the market. Your friendly realtor may help with this, but be aware that sometimes they can inflate the value in the hope of getting your business. You can also look at what price similar houses close by have sold for. Or you can pay a qualified valuer to assess your home.
Now you have a starting figure, you can work out how much equity you have in your home. The other important figure to work out is how much you need for whatever purpose you have in mind. Hopefully that works out to be less than the equity available! It's even better if it's less than 80% of the available equity.
At this point it's important not to get carried away. It can be all too easy to say, well, I have $50,000 available and I really only need $30,000 to complete the repairs, so why not borrow $40,000 and blow the rest on a holiday? Remember - the more you borrow, the more it will cost you in repayments. It's very easy to borrow too much, only to find yourself struggling to meet the payments and maybe even losing your home.
You also need to decide what type of home equity loan you want. There are two main types - a closed end loan and a line of credit. A closed end loan is basically the same as a standard home mortgage - you borrow the amount for a set period of time, and make payments over time to gradually pay off the balance.
A line of credit, on the other hand, is like having a credit card with a big limit. Some banks will require you to make minimum payments each month, others only require payments if you're at your limit. Either way, the loan will only be for a set period of time, and at the end of that you will either have to extend the time period or refinance the loan with another lender. This type of facility can be useful if you're disciplined with your money, but if you're the type of person whose credits cards are always at their limits, it may not be a good idea at all to have ready access to such a large amount of credit.
Next, you need to work out how long you want to borrow the money for. This will vary depending on how much money you are borrowing, the type of home equity loan and how much you can afford to pay. There are lots of good mortgage calculators online that can help you to work this out. If borrowing the money over 5 years for a closed end loan means you won't be able to meet the payments, then see if spreading the loan over 10 years becomes more affordable for you. You will pay more in the long run, but at least you won't default on your loan.
When you know what you want, it's time to go and find it! It may be worth starting with banks recommended to you by friends and family - at least they'll be able to give feedback on their experiences. You can also shop around online, looking for the best deal.
Finally, when you have chosen the loan you want and are ready to proceed, do two more things. Firstly, check for fees. Banks are aware of the need to be competitive, and will often avoid charging up front fees for that reason. However it's amazing what can be hidden in the fine print of a contract. So read any loan documents thoroughly before signing. If you can, get the contract explained to you by your legal advisor.
Home equity loans can be a wonderful tool when used correctly. Do your homework first, find the loan that best matches what you want, and go for it. Just make sure you don't over extend yourself or sign documents that will give you nightmares forever.
Copyright Felicity Walker 2005
Investing and finance are two passions of the author. To find out more, check out http://www.homeequityloanzonecentral.com for more information.
MORE RESOURCES updated Sun. January / 17 / 2021
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How a mortgage refinance affects your net worth Fox Business
3 Mortgage Refinance Strategies to Consider in 2021 The Motley Fool
Mortgage refinance rates continue hitting record lows – here’s how to get the best deal now - Fox Business
Mortgage refinance rates continue hitting record lows – here’s how to get the best deal now Fox Business
Thinking of refinancing your mortgage? Do your homework before you jump in. - The Philadelphia Inquirer
Thinking of refinancing your mortgage? Do your homework before you jump in. The Philadelphia Inquirer
What Is A Debt Consolidation Refinance? | Pros And Cons The Mortgage Reports
I'm retired and won't live to see my mortgage paid off. Should I refinance to lower my monthly payment? - MarketWatch
I'm retired and won't live to see my mortgage paid off. Should I refinance to lower my monthly payment? MarketWatch
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Everything You Should Know About The New Mortgage Refinancing Fee That Goes Into Effect Dec. 1 Forbes
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Today’s mortgage refinance rates hold steady for third consecutive day | December 11, 2020 - Fox Business
Today’s mortgage refinance rates hold steady for third consecutive day | December 11, 2020 Fox Business
Should You Lend Your Kids Money for a Home Down Payment? The Motley Fool
Today’s mortgage refinance rates mixed — one key rate drops while two hold steady | December 15, 2020 - Fox Business
Today’s mortgage refinance rates mixed — one key rate drops while two hold steady | December 15, 2020 Fox Business
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10 things to know before refinancing your mortgage Fox Business
Today's mortgage refinance rates don't budge for fourth consecutive day | November 24, 2020 - Fox Business
Today's mortgage refinance rates don't budge for fourth consecutive day | November 24, 2020 Fox Business
Today's mortgage refinance rates stay low with the election underway | November 3, 2020 - Fox Business
Today's mortgage refinance rates stay low with the election underway | November 3, 2020 Fox Business
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Today’s mortgage refinance rates keep sinking, reaching 37-day low | November 13, 2020 - Fox Business
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The impact of the coronavirus on mortgage refinancings Brookings Institution