When an individual borrows money using the equity in their home as collateral, the transaction is known as a home equity loan. Many wonder about the differences between home equity loans and home equity lines of credit. Although both use the home's equity as collateral for the loan, the difference is that a home equity line of credit is an open end loan that is similar to a credit card in that it can be used more than once as the principal balance is reduced by payments. Home equity loans, on the other hand, involve the applicant receiving one lump sum amount without the ability to borrow additional funds.
There are a number of benefits to obtaining a home equity loan, including the possibility of increasing a homeowner's tax deduction. Many individuals request a home equity loan in order to pay off their credit card bills. This method, however, is open to debate among financial experts as to whether or not the choice is a good one. The reason is because credit cards are unsecured in that there is no collateral securing the loan, which means they can often be settled for a lower balance if financial hardships arise in the future. If you use your home's equity for the collateral in a loan, on the other hand, that loan is instantly secured and failure to repay it on time may result in the loss of your home. In essence, when you request a home equity loan in order to pay off your high interest credit cards, you are turning unsecured debt into secured debt.
When it comes time to determine your home's equity, the process is quite simple. You take the balance of the remaining mortgage and subtract it from the appraised value of your home. An example is a home that is valued at $300,000 and has a remaining mortgage balance of $100,000. The home's equity, in this case, would be $200,000. When applying for home equity loans, lenders often require a written appraisal in order to verify the home's value. In addition, several other factors will determine whether or not the loan application is approved. Among them, the borrower's past credit history, current employment, wages and debt will all be considered prior to granting a home equity loan.
Among the most sound reasons for requesting home equity loans are to finance a college education, pay for necessary medical expenses or even to purchase a second home. When comparing rates for home equity loans, take the time to shop around and find the best deal possible before signing on the dotted line.
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