When property owners apply for a home equity loan or credit line, the available equity is used as collateral. Home equity can be calculated by subtracting the balance owed against the home loan from the appraised property value. Unfortunately, the banking and real estate crisis depleted accrued equity for many homeowners due to significantly reduced property values.
Before tying up home equity in second mortgages or lines of credit, borrowers must determine if this is the best financial option. Most borrowers have every intention of paying off home loans, but even the best laid plans can fail. By using real estate as collateral, homeowners could be placing their property at risk for foreclosure.
Homeowners require home equity loans for many reasons. The most common include making home improvements and paying off credit cards and unsecured loans. Home loans can be a good choice for borrowers carrying more than $10,000 in outstanding debts.
The interest rate assessed against home loans can be substantially less than interest assessed against unsecured loans. Transferring debts to a low interest loan can save borrowers hundreds of dollars in interest charges.
Some people take out home equity loans to consolidate college loans. Several options exist for consolidating student loans without using real estate as collateral. Post graduates with federal student loans should research education loan consolidation alternatives by visiting the Department of Education website at ed.gov.
Graduates carrying multiple private college loans can obtain loan consolidation resources through SallieMae.com. Additionally, banks and credit unions offer options for consolidating private and federal college loans.
Homeowners needing to make home improvements or consolidate unsecured debts may find a home equity line of credit to be a better option. HELOC loans offer borrowers a line of credit which can be used as needed. Mortgage lenders base the amount of available credit on the amount of accrued equity, along with the borrower’s credit history and FICO score.
Borrowers are only required to pay interest against funds they borrow from their line of credit. For example, a homeowner obtains a HELOC loan with a $30,000 line of credit and borrows $10,000 for home improvements. The bank assesses interest against the $10,000, not the full amount of available credit. Each time homeowners make a payment, their available line of credit increases.
Borrowers can elect to repay borrowed funds in a lump sum payment or through a monthly installment plan. A unique feature of HELOC loans is during the first ten years borrowers can choose to pay only the interest assessed on borrowed funds. Afterwards, they enter into the ‘draw’ period and must pay the outstanding balance in full.
Depending on the circumstances, obtaining a second mortgage may be a better choice than obtaining a home equity loan or line of credit. With second mortgages, homeowners borrow a fixed amount of money which is paid via monthly installments over a period of time.
Homeowners should take time to thoroughly research each type of home loan to determine which is best suited for their needs. For most people, their home is their most valuable asset. Securing a loan with real estate can have severe consequences if borrowers are unable to adhere to loan payment obligations.
The best source for obtaining accurate information regarding home equity loans is the Federal Reserve Board website at FederalReserve.gov. Visitors can learn how home equity loans are repaid; understand what to look for when shopping for a home loan lender; and use loan calculators to evaluate the cost of obtaining a home equity loan or line of credit.