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The Basics of Home Equity Loans
If you’re new to the financial game than there are certain phrases that you may be unfamiliar with. Home equity is most likely one of them. What is home equity and what does it have to do with me?
Basically, when you purchase a house, home equity is the money that you have paid back on your mortgage. The more money to pay to your mortgage, the more home equity you have. For example, for those who own their house, they have very high home equity. If your house is valued at $400,000 and you have paid that back, your equity is also at $400,000. If your house is worth $250,000 and you still owe $200,000 on it, then your equity is $50,000. Even those who have very little home equity, for example, $20,000, can still use this to their advantage.
This seems simple enough right?
Home Equity Loans and Lines of Credit
However, home equity can get a little more confusing when other purchases come into play. For example, many people choose to use their home equity to secure different types of loans. Some use their home equity to pay for college for their children. Others use equity to purchase a brand new car. Others use their home equity loans for family vacations, for house repairs, and for weddings.
These loans are classified as home equity loans and are essentially a second mortgage on your house. They are secured because you have paid the amount off already. Your house acts as collateral if you are ever unable to pay back these loans. This is where people can get into trouble and, in more recent times, lose their homes. Home equity line of credit is very similar except you can only receive 75 percent of what you have paid off.
Why Choose a Home Equity Loan
For most people, borrowing money and taking out loans is a fact of life that you simply cannot get around unless you have come into a large sum of money. However, home equity loans can offer some very favourable advantages. For one, you are able to get cash at a lower interest rate than other loans. Furthermore, the interest that you are accumulating is almost always tax deductible. Finally, even with the small decrease in values of homes, the real estate trend will always go up meaning your house will always stand to make you money.
Compared to a credit card, or a standard loan, a home equity loan is much cheaper and much easier to pay back. You will not feel like you are taking two steps backwards due to overwhelming interest rates. Furthermore, you can use your home equity loan for anything. You do not need to be approved or prove you are a good candidate like you do in other loans.
Essentially a home equity loan is almost like a reward loan for paying off your mortgage. However, don’t get carried about when it comes to your home equity. Always speak to a financial advisor when considering dipping into your home equity, especially when times are tough.