Working as a financial consultant, I get hundreds of emails and calls everyday inquiring about many different financial products. I have noticed that home equity loans are a very common source of doubt for my customers. As regards home equity lines of credit… well, let us just say that great many people do not even know of their existence. It is a real pity that these products are not better known because they are incredibly versatile as they can be used for many different purposes. They are also very cheap sources of finance.
That is why I decided to write an article on the basic concepts of both of these fantastic financial products.
Home Equity Loan
Home equity loans are usually referred to as second mortgages, because they are secured against the value of the house. The borrower uses the equity on his property as a collateral for the loan. So… what does equity mean? Equity is the different between the property’s market value and the remaining balance of the mortgage and any owed debts related to the property. If you have finished paying the mortgage on your home (or never applied for one), then the equity on your home is 100% of the real value. If you have already paid 40% of the home, then the equity will be worth 40% of the real value of the property.
Loans based on the equity on your home are marvellous. They are granted almost to any home owner and their terms are usually extremely favourable. Not only are the interest rates very low, but they are also deductible!
What use can the borrower give to the money? Well, that is the beauty of this type of loan. You can do anything, the world is your oyster! Whether you need to remodel your house, add rooms to it, go away on a long vacation, purchase a used or new car, or even acquire a second property, home equity loans can help you in so doing. There is no limit to what you can do, only your imagination.
Repayment plans range from 5 to 20 years, and as you might have noticed, they are somewhat shorter than the repayment plans on mortgage loans.
Home Equity Lines Of Credit
This credit is also know as an open-end home equity loan. It is also a loan based on the equity on your home, but it has one major difference: you decide how much and how often to withdraw funds. The lender sets a limit on how much can be withdrawn, but once this amount is repaid, the borrower can take out funds again, and so on.
Lines of credit based on equity are perfect for you if your monthly income is variable (as often happens with self-employed people). There is a minimum monthly payment which consists of the interest rate if you have not withdrawn any funds.
If what you are looking for is flexibility, then a line of credit will be just perfect for you. No fixed monthly payments, instant availability of funds at your best convenience, among other advantages.
Now you are fully aware of what these two equity based credit products have to offer, it is up to you to choose the one which best meets your requirements.
By: Mary Wise
Posts Tagged ‘Home Equity Loan’
Home Equity Loans VS Home Equity Lines Of Credit
December 4th, 2009Student Loan Payoff Through A Home Equity Loan
November 7th, 2009
As many college students go through the rigors and necessary steps to finish their educations, once they’re done and successfully graduated, they know it’s time to start their own, independent lives. With school out of the way, jobs on the horizon and a bright future ahead many will be seeking to purchase their own homes – if not right away, sometime down the line. Going with the assumption that students will in fact buy a home within a 5 year span of graduating, they’re probably also looking to satisfy their student loan balances within that time frame. Here is where opportunity lies.
If such a situation exists for you, where student loans need to be paid and you now own a home, there is a way in which you can use your new home to pay off your student loans. How, you might ask? Well, it’s simply a matter of using a home equity loan to pay off your student loans, and quite quickly too.
Shortening Student Loan Payoff Through A Home Equity Loan
It’s no surprise that most students coming out of college feel that paying off their student loans will be a long haul. Yet, to your delight, as many other students’, there is a quicker solution to rid your self of student debt – through managing your debt responsibly and considering using a home equity loan. Considering here is mentioned merely because using a home equity loan to pay off your student loans is a two-sided financial action, having both ups and downs, defined pros and cons.
Take Into Mind Home Equity Loan Perks
When looked at and reviewed initially, it would seem that consolidating your student loans into a home equity loan would be a wise decision, one with little to think or worry about. This is so due to how home equity loans work. Since these types of loans essentially use your newly owned property as collateral, banks are able to offer much lower rates than the majority of what private student loans would. This is a saving grace, in more ways than one. Financially, you’ll save literally thousands of dollars (via long-term interest payments), not to mention benefiting from added tax perks. And better still, in terms of lowering your total expenditures, home equity loans are tax-deductible.
But, Also, Consider The Pitfalls of Using A Home Equity Loan
It’s clear that utilizing a home equity loan to pay off student loan debt is beneficial, yet it is still a bold and weighted move. Know that using a home equity loan isn’t 100 percent without caution. Firstly, it’s paramount to mention again that your house is used as collateral, which could be to your detriment, especially if rough times unexpectedly pop up, which could cause you to have to default on your mortgage. This could cause you to lose your home, which would be an awful thing to deal with.
And also, factor in that you will lose the deduction that comes with student loan interest, despite gaining a tax deduction for the paid interest on your home equity loan. The ideal thing to do here is to calculate, by crunching numbers, which loan option would best suit you in the long run. Make sure that you understand your options, as well as the ups and downs of home equity loan use to pay off your student loan balances.
By: E.S. Cromwell