Get a Home Equity Loan

The most important word in “home equity loan” is equity. Start with the fair market value of a home, subtract the mortgages (first and second) and any liens against the property, and what you have left is the equity. This equity can be used as collateral to secure cash in the form of a loan or mortgage.

The amount borrowed is based on a percentage of the appraised value of the home. The percentage rate can vary from 75% to 125%. The length of the financing will also vary. The two main types of home equity loans are fixed rate loans and adjustable rate loans.

Fixed rate loan – provides a fixed amount of money at a fixed interest rate, repayable in equal payments over the life of the loan. Fixed rate financing costs more in set-up fees and comes at higher interest than adjustable rate loans. But if homeowners stay put and interest rates go up, they will save money over a comparable adjustable rate loan.

Adjustable rate loan – the interest rate goes up or down according to the index upon which it is based. Adjustable rate loans will have a cap on how high the interest rate can go. Usually called ARMs (Adjustable Rate Mortgages), this type of loan has lower up-front costs and starts at a lower interest rate than fixed rate financing. This means lower initial monthly payments.

Home Equity Line of Credit (or HELOC) loans offer unique options for borrowers. HELOCs are generally adjustable to the prime interest rate, which means if the prime rate goes up or down, then so does your payment. The primary benefit of a HELOC is that as you pay it down, you still have access to your equity (usually through a check or credit card). That equity is always available to you for investments, paying off high interest debt, vacations, or to pay off unexpected bills.

Putting Home Equity to Good Use

According to the Consumer Banker Association, the top ten reasons for getting a home equity loan are:

Debt consolidation, the most popular reason people cash out their home equity, is a smart form of financing because of the money it can save. For example, say you owe $15,000 on a credit card that charges 17% interest. If you get a debt consolidation loan at 9% interest and pay it off in five years, you’ll save you over $30,000!

If you’re paying more than 15% interest on anything, you should seriously consider a debt consolidation loan. The right terms could drop your monthly payments by 35%-50%, depending on interest rates, origination costs and tax consequences.

Even for people who have bad credit or who have filed for bankruptcy, a home equity loan is not out of reach. It can be a good way to make a fresh start.

Which way is best to tap into your home equity?

There are several options, and a few things to consider, when deciding which right for you.
If the interest rate on your mortgage is higher than current rates, it may make sense to refinance and take a lump sum of cash from your home’s equity. You’ll simply refinance your mortgage to a larger loan amount and take the difference in cash.

Another option is a home equity loan. A home equity loan is essentially a second loan that you take out in addition to your first mortgage. Commonly referred to as a “second mortgage,” a home equity loan allows you to tap into your home equity to get cash without refinancing your first mortgage. A home equity loan is a good choice if you’d like your cash in a lump sum and you already have a great rate on your first mortgage.

A home equity line of credit (HELOC), your third option, is very similar to a credit card except that it uses the equity in your home as the revolving line of credit. You make monthly payments only if and when use the money. But, unlike credit cards, the interest is usually tax deductible*(Check with your Accountant). With a HELOC, you can get a lump sum at closing, or elect to take only part of your money and draw on the rest when you need it.

Unlike a home equity loan or a refinance, you can get a home equity line of credit in as little as ten days. A HELOC is a good choice if you’d like ready access to your home equity when you might need it.

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