What is Home Equity?
The definition of "home equity" is the monetary value associated with how much perceived value you have earned in your residential real estate endeavor. You can calculate your equity simply by subtracting the mortgage balance from the appraised value and the sum is considered the amount of equity that you have in your home.
Using a home equity line to borrow against the equity in your home has become a popular source of consumer credit. And lenders are offering these home equity credit lines in a variety of ways.
You will find most home equity credit lines come with variable interest rates, some come with attractive low introductory rates, and a few come with fixed rates. You also may find many equity loans have large one-time upfront fees, others have closing costs, and some equity lines of credit have continuing costs, such as annual fees. You can find some home equity line of credit products will feature a large balloon payment at the end of the loan, and others with no balloons but with higher monthly payments.
Home equity interest rates will vary based on credit, loan size, loan to value and yes some lenders have lower rates than other lenders, so shop around. When you are reviewing the loan disclosures, compare the APR and interest rate. Don't forget to review your Good Faith Estimate and it doesn't hurt to see if the lender will reduce or eliminate some of the fees and closing costs.
The FTC believes that no one home equity loan is right for every homeowner. The challenge, then, is to contact different home equity lenders, compare credit lines and equity loan options, and select the home equity credit line best tailored to your needs.
Be sure to review the home equity contract carefully before you sign it. Do not hesitate to ask questions about the terms and conditions of your financing. To help you do this, you may want to consider the following questions and to use the home equity checklist at the end of this brochure. (We apologize that the checklist is not available on-line. To obtain a copy of the checklist, please request a free copy of the brochure by contacting: Public Reference, Federal Trade Commission, Washington, D.C. 20580; (202) 326-2222. TDD call (202) 326-2502.)
Is a home equity credit line for you?
If you need to borrow money, a home equity line may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates. And they may provide you with certain tax advantages unavailable with other kinds of loans. (Check with your tax adviser for details.)
At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. And, if you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more freely.
Remember too, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your home, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed payment amounts.
You also may want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money. In addition, you may want to ask about loans for specific items, such as cars or tuition.
20 Reasons Why a Home Equity Loan Is More Powerful than a Personal loan or Credit Lines
How much money can you borrow on a home equity credit line?
Depending on your creditworthiness (your income, credit rating, etc.) and the amount of your outstanding debt, home equity lenders may let you borrow up to 85% of the appraised value of your home minus the amount you still owe on your first mortgage. Ask the lender about the length of the home equity loan, whether there is a minimum withdrawal requirement when you open your account, and whether there are minimum or maximum withdrawal requirements after your account is opened. Inquire how you gain access to your credit line -- with checks, credit cards, or both.
Also, find out if your home equity plan sets a fixed time -- a draw period -- when you can make withdrawals from your account. Once the draw period expires, you may be able to renew your credit line. If you cannot, you will not be permitted to borrow additional funds. Also, in some plans, you may have to pay your full outstanding balance. In others, you may be able to repay the balance over a fixed time.
Read the rest of the FTC article online at http://www.ftc.gov/bcp/conline/pubs/homes/homequt.htm