subject: Home Equity Tips for Borrowers [print this page] Home Equity Tips for Borrowers Home Equity Tips for Borrowers
Home equity refers to funds accrued against real estate which property owners can borrow against. The amount of available funds can be calculated by subtracting the home loan balance from appraised property value.
Two types of home equity loans are available. The first involves taking out a home equity loan, also known as a second mortgage. The second type is a home equity line of credit (HELOC) which allows borrowers to use available funds as needed.
Real estate is used as collateral to secure the note. Before exhausting available home equity, borrowers should weigh the pros and cons of this financing option. Most borrowers intend to pay off home equity loans, but if unexpected situations arise property used as collateral could be at risk for foreclosure.
Home equity loans can provide necessary funds for major expenses. The most common reasons for taking out a second mortgage or HELOC is to make home improvements, pay college tuition, and pay off credit cards. Home equity loans can be a good choice when borrowers carry more than $10,000 in unsecured loans.
Home equity loans are assessed a considerably lower interest rate than unsecured loans and credit cards. Transferring debt to a low interest loan can save borrowers a substantial amount of money in interest charges.
People oftentimes take out home equity loans to consolidate student loans. Borrowers should consider other financing options before using their home as collateral. Borrowers carrying federal student loans can locate a variety of student loan consolidation alternatives through the Department of Education website at ed.gov.
Borrowers with private college loans can obtain loan consolidation through SallieMae.com or discuss education loan programs with banks or credit unions. Borrowers with both private and federal loans can review available consolidation options at StudentLoanConsolidator.com.
Borrowers wanting to consolidate unsecured debts or make home improvements may find a home equity line of credit to be a better option. HELOC loans provide borrowers with an open line of credit which can be used as needed.
Interest is assessed only against borrowed funds. For example, a homeowner establishes a $30,000 line of credit and borrows $15,000 for home improvements. The bank charges interest against the $15,000; not the full $30,000. Each time borrowers make a payment their available line of credit increases.
A unique feature of HELOC accounts is borrowers can elect to only pay interest payments for the first ten years. Afterwards, they enter into a 'draw' period and must pay the outstanding balance in full. Borrowers can also elect to repay borrowed funds through monthly installments.
Depending on circumstances, taking out a second mortgage might be better than opening a HELOC account. With home equity loans, homeowners borrow a fixed amount of money which is repaid through monthly installments.
Borrowers should research both types of home loans to determine which is best suited for their needs. For most people, real estate is one of the most valuable assets owned. Securing a loan using home equity can have serious consequences if borrowers cannot adhere to loan payment obligations.
A trusted source for obtaining accurate home equity loan information is the Federal Reserve Board website at FederalReserve.gov. Visitors can learn about payment options; understand what to look for when shopping for a home equity lender; and use loan calculators to determine the true cost of obtaining home equity and HELOC loans.
