Home Equity Loan - A Popular Fund Raising Option
By Sachin A
Home equity loans have become one of the most
popular fund raising options for individuals.
Home equity loans are the loans taken using
your home's equity as the collateral. Thus they are a type of secured loan.
These loans are based on two facts - first,
that you have repaid a certain portion of the home mortgage and thus should
be able to reutilize that equity; and second that the value of your home
has increased since you first purchased it.
The common reasons for taking an equity loan
are home improvements, educational expenses, medical bills, debt consolidation
etc. There are usually no restrictions on how the borrowed money is used.
The interest paid on such loans is usually tax
deductible. Also the interest rates on them are lower than credit card other
type of consumer loans. (They are higher than the first mortgage.)
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Let's understand what "home equity" is.
Home equity is defined as the difference between
the market value of your home and how much you owe on the mortgage (or mortgages
in case you have more than one.)
The market value of your home will be determined
by bank's appraiser or a licensed appraiser.
Suppose market value of your home is $ 100,000
and you have made a down payment of $ 10,000.
Then your equity
= market value - amount owed
= $ 100,000 - $ 90,000
= $ 10,000
After three years if you have paid back $15,000
more of the debt, you will still have $75,000 of the debt left. However after
three years the market value of your home would have increased to $ 150,000.
Thus your equity after three years would be
Market value - amount owed
=$ 150,000 - $ 75,000
=$ 75,000
Besides home equity loans (fixed rate home equity
loans), there is another type of home equity debt - home equity line of credit
or HELOC.
Both of them are known as "Second Mortgages"
as they are secured by your home just like the first mortgage.
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"Second Mortgages" are repaid sooner than the first
mortgages, which are usually repaid in thirty years. Home equity loans usually
have a time frame of five to fifteen years.
Home equity loans are a one time lump sum loans,
that are repaid over a time period decided beforehand.
On the other hand, home equity line of credit
or HELOC allows you to borrow up to a certain limit for the period of the
loan. The time limit of the loan is set by the lender. You can withdraw money
any time during the time period and repay it any time. It works the same
way like a secured credit card.
A HELOC has a variable interest rate that varies
through out the period of the loan. The HELOC interest rate depends on the
prime lending rate (prime lending rates are fixed by the federal reserve
in the US.) The payments can vary depending on what is the amount that has
been borrowed, the interest rates and whether the loan is in the draw period
or the repayment period.
The credit rating of the borrower is also a
factor in deciding the home equity loan interest rates.
The draw period of the line of credit is the
period during which you can borrow any amount up to the limit specified by
the lender. Also only the interest has to be paid during this period; however
you may choose to repay the principal amount if you wish.
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During the repayment period, no new debt can be taken
and the existing debt must be paid back.
Usually draw periods are for ten years and repayment
periods around fifteen years, but this varies depending on the lender's policies.
Withdrawals for HELOC can be done by checks,
credit cards or EFT. Lenders may have certain terms which make require you
to take an initial advance when the HELOC is setup, borrow a minimum amount
each time you use it and keep a minimum outstanding balance.
If you decide to sell off your home, you have
to pay back full amount of the home equity loan.
Sachin
A. is a freelance writer and specializes in articles that require extensive
research. Check out his work at
http://www.articlemanual.com .
More home equity articles at home
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