Home equity loans are an important aspect of owning a home. Whether you take one
out or not, it is good to know what they are all about.
What is a home equity loan all about?
To understand a home
equity loan, you need to understand what home equity is. As you make your
mortgage
payments, you continue to own a larger share of the home, compared to the
remainder of your loan. The actual amount of the loan that you have paid off is
your home equity. For instance, if the value of your home is $300,000, and the
remaining balance on the loan is $160,000, that means that your equity in the
home is $140,000.
A home equity loan is a loan in which your home equity
serves as the collateral, rather than the home itself. These loans are commonly
used to pay for major home repairs or even medical bills or school tuition. Home
equity loans are also called second mortgages, since they are secured against
the value of the property. It is important to note that if you take out a home
equity loan, your home equity will decrease.
How do I use the money?
There are many reasons why you may want
to take out a home equity loan. You can use the money from the loan to
consolidate
your debts or make major improvements to your home. The money can also be
used to pay off medical bills or school tuition or any other investment or
purchase.
How do I calculate the amount I can borrow?
As seen in the
example above, your equity is determined by the amount of the mortgage you have
already paid. Just subtract the remaining balance on the mortgage from the
appraised value of the home. That amount is, usually, what you can borrow. Keep
in mind, however, that some states don't allow borrowing 100% of your home
equity.
What is the difference between a home equity loan and a line of
credit?
With a home equity loan, like a regular loan, you'll receive the
entire amount of the loan up front. On the other hand, with a home equity line
of credit, you do not receive the full amount at once. Instead, you can draw the
money out according to your needs. In this regard, a home equity line of credit
works similarly to a credit card. The difference, however, is that a home equity
line of credit will give you a higher credit limit and a very low interest rate.
What are the benefits of a home equity line of credit?
There are
several advantages to taking out a home equity line of credit. Here are just a
few reasons why doing so can be beneficial to you:
- By taking out a home equity line of credit, you'll have access to your money
when you need it. Whatever your reason for taking out money, you can benefit
from having it available at all times.
- Rather than paying interest for the entire loan, you only pay interest on
the money you withdraw.
- With a home equity line of credit, you don't have to worry about the closing
costs involved with taking out a loan that you would with other types of loans.
- The money you can withdraw from your home equity line of credit is tax
deductible.
Why should I consider a line of credit over a credit card?
As
mentioned above, a home equity line of credit is very similar to a credit card.
The benefits of a line of credit are being able to draw money at any time, with
low interest rates and a higher credit limit. In fact, the credit limit will
usually be equal to the amount of equity you have in your home.
How can I access my home equity line of credit money?
The money
from your home equity line of credit can be easily accessed and used through an
ATM card or personal checks.
What are the tax implications of a home equity line of
credit?
For the most part, the money you can withdraw from a home equity line
of credit is tax exempt. However, there are some limitations to this. For
instance, if you take out an amount over $100,000 at once, you may be
taxed.