Home Equity Loans
If you own your own home, you may find that over time, the home’s value has increased. The amount of money that your home is worth over the amount you paid is called equity. In other words, if you paid $100,000 for a home, and then it was appraised at $120,000 in a few years, you gained $20,000 in equity over that time. Many homeowners choose to utilize and “borrow” that equity by applying for home equity loans. Not all home equity loans are alike, and many have different terms that can be confusing, so it’s important to know what to look for when choosing the option of taking out a home equity loan. Unlike a traditional loan where the borrower is accountable for repaying the money based on their credit, home equity loans use the borrower’s home as collateral. This means if the buyer defaults on their loan, they may potentially lose their home. That is why it’s extremely important for people looking into these types of loans to know the risks, and also not to borrow too much at once. Just because you have a large amount of equity in your home does not mean that you have to borrow the full amount. Homeowners have the option of only borrowing what they want to out of the total equity as determined by the bank. In addition to having established equity, it’s important to also be sure your credit is in good shape. Just like any other type of loan, a good credit score is needed in addition to the equity in your home. Be sure to get a copy of your current FICO score before applying for home equity loans, that way you are armed with the knowledge of your scores, and have more negotiating power when it comes to interest rates. Typically rates are lower on equity loans, since there is already a secured loan in place (i.e. the mortgage on your home). Just like buying a home, there are closing costs and other fees associated with home equity loans. Some of the fees include appraisal fees, loan origination fees, and any discount points, much like a mortgage.
Home equity loans can serve many purposes. A lot of homeowners choose this type of loan to remodel their home in order to sell it. They may do things like remodel their kitchen and bathroom in order to increase the selling price of their home before they put it on the market. Some homes, particularly older ones, may need a facelift before they can be profitable in the marketplace, and home equity loans are perfect for this reason. Still others may choose home equity loans for the purpose of remodeling just for themselves, if they have an outdate kitchen and want new appliances for example. These types of loans can be very helpful when a major renovation on a home is needed. They can encourage people to make improvements that they may not have otherwise been able to afford. It may not be very well known that home equity loans can actually be used for just about anything. For example, if someone needs money fast, and can get it at a better rate through a home equity loan, they can use the money for other things like major purchases of vehicles, appliances, or other items. When applying for a home equity loan, it’s important for homeowners to do their homework. Shop around to find the lowest interest rate and closing costs, and keep in mind that an appraisal will need to be performed by the lender to determine what kind of equity is actually there. The appraiser will then pass this information along to the bank, which determines the amount of money the lender is willing to lend to the borrower. When you own your own home, you gain a new sense of financial security, since the equity that you build is yours. Home equity loans are just one of many different ways that homeowners can get the money they need to accomplish their long term goals. With some insight into how the process works and a game plan for using any money received from a home equity loan, people can reap the benefits without losing any money in other ways, all while improving their homes.