Home equity refers to the difference between balances owed on home mortgage loans and appraised property value. When homeowners obtain a home equity loan or line of credit, the available equity is used as collateral to secure the loan. Unfortunately, many homeowners have lost considerable accrued home equity due to drastically reduced property values.
Prior to using home equity to secure real estate loans, homeowners should take time to consider if this is the best financial decision. Most borrowers intend to pay off home equity loans, but even the best laid plans can fail. When homeowners use accrued equity as collateral for secured loans they could place their home at risk for foreclosure.
People often use home equity loans for home improvements or to pay off unsecured loans or credit cards. When borrowers have $10,000 or more in outstanding debts, home equity loans might be a good decision. Unsecured loans typically carry a much higher rate of interest than home equity loans. Transferring debts to low interest loans can save borrowers hundreds of dollars in interest.
Another common use for home equity loans is to consolidate student loans. Multiple options exist for student loan consolidation without using real property as collateral. The Department of Education helps post graduates consolidate federal education loans, while SallieMae can help students carrying multiple private education loans. Banks and credit unions offer a variety of options for consolidating federal and private student loans.
Homeowners in need of funds to consolidate debts or make home improvements may find that a home equity line of credit is a better option. HELOC loans provide borrowers with an open line of credit that can be used as needed. Lenders base the amount of available credit on borrowers’ credit history, FICO score and amount of home equity.
When homeowners take out a home equity line of credit they only pay interest against the funds they use. For example, their HELOC credit limit is $50,000 and they use $10,000 for home improvements. The banks only charges interest on the $10,000. Each time borrowers make an installment payment the amount of available credit increases.
Homeowners can repay borrowed funds in a lump sum or through monthly installments. During the first ten years of HELOC loans borrowers can elect to pay only the interest assessed on borrowed funds. Afterwards, they enter into the ‘draw’ period and are required to pay the outstanding balance and accrued interest in full.
In some instances, it might be better for homeowners to take out a second mortgage home loan instead of establishing a HELOC account. With second mortgages, homeowners borrow a fixed amount of money which is repaid via monthly payments over a predetermined timeframe.
Borrowers should take time to investigate available loan options to determine which type of loan is best suited for their needs. For most people, their home is their most valuable asset. Using the property as collateral can have severe consequences; particularly if borrowers are unable to adhere to loan payment obligations.
One trusted source for obtaining accurate home equity and HELOC loan information is the Federal Reserve Board website at FederalReserve.gov. Visitors can use home equity calculators to evaluate the true cost of obtaining secured loans; learn how HELOC and home equity loans are repaid; and understand what to look for when shopping for a home equity lender.