If you're a homeowner, chances are that you've been deluged with offers from
finance companies to lend you money based on the equity you have invested in
your home. A home equity loan is a loan extended to you that is secured by your
home. The amount of the loan is based on how much 'equity' you have invested in
your home. The basic explanation of 'equity' is 'the difference between your
home's value and how much you still owe on the mortgage'.
In other words, if you bought your home for $125,000 and put $20,000 down on
it, financing $105,000, then your equity in your home on the day that you close
the deal is $20,000. Now imagine several years pass. You've paid off $15,000
toward your mortgage - but at the same time, the value of your house has
increased to $175,000. Your equity in your home is now $85,000: $175,000 (your
home's current value) - $90,000 (the amount you still owe on your home) =
$85,000.
A home equity loan allows you to turn the equity you have in your home into
cash by borrowing money and using your home as collateral to insure that you'll
repay it. If you default on the loan, the bank or housing agency can force the
sale of your home to recover its money.
There are many reasons that people apply for home equity loans, though most
fall into a few broad categories. The reason for taking out a home equity loan
will often determine what kind of loan you apply for.
Debt Consolidation
By far one of the biggest reasons that homeowners apply for a home equity
loan is to consolidate their debts. If you have outstanding debt to several
different creditors at several different interest rates, it's often to your
benefit to consolidate all those loans. To do that, you can take out a home
equity loan for the amount that you owe on all your debts together - or more -
then use that money to pay off all your outstanding debts in full. By doing
that, you trade writing several checks each month for writing one check, which
is often less than the amount that you've been paying on all of the debts
combined. This is because you're also trading in the higher interest rates on
your credit cards and loans for a lower interest rate on one loan. Chances are
that you've also set a fixed time to pay back that loan, most often 15 years,
though it could be as little as five or as much as thirty.
Home Improvements
If you want to make improvements or repairs to your home, it only makes sense
to get the money OUT of your home to do it. Home improvements are one of the top
five reasons that homeowners give for taking out home equity loans. If the
reason for making improvements is to increase the home's value or prepare it for
a sale, then you should definitely take a look at the home improvements that
return the most on your investment. In many cases, when the reason for taking
out a home equity loan is to pay for home improvements, the homeowner applies
for a home equity line of credit rather than a flat out loan.
Weddings, Vacations and College
Special events like weddings and vacations are the third most popular reason
for taking out a home equity loan. For a wedding or other special event, where
there will be multiple payments made to different merchants, a home equity line
of credit is often a better choice than a lump sum home equity loan.
About the Author
Joseph
Kenny is the webmaster of http://www.selectloans.co.uk/
