Home Equity Loans

Your home can be your greatest financial asset; proving that you have accrued equity on your home will open up new opportunities for receiving loans and gleaning new investments with lower interest rates.  Your home equity, in simplified terms, is the current value of your home minus your remaining mortgage payments.  The leftover value represents the amount of your home that you actually own and is called equity.   The importance of your home equity cannot be overstated; it is on this value that lenders determine your financial worth.  The more equity you have, the more you are able to borrow ‘against’ your house because your home represents a higher collateral to lenders.

Types of Home Equity Loans

Financial experts have been prescribing home equity loans for years.  Borrowing against your own equity means lower interest rates and gives you tax-deductible interest.  Many people use home equity loans to pay off higher interest loans, make investments in other properties or business, or use in a time of financial uncertainty.  However, it is important to be aware that as you do borrow against your equity, your built up equity will be depleted.  It is important to carefully consider taking out a home equity loan and, in many cases, contact a certified financial advisor.  When you do make the decision to take out a home equity loan there are a few options.

  • 2nd Mortgage: This type of loan is considered traditional for lenders.  Your loan will be dispersed in one lump sum and is required to be paid over a fixed period.  Interest will start accruing immediately.
  • Home Equity Line of Credit: Although this is a less traditional method, it gives the borrower a credit card with a specified limit, based on equity, to be used as expenses arise.  Interest will start accruing after the first purchase with the line of credit.
  • Refinancing: Although not a loan in the traditional sense, refinancing can help build up your home equity faster.  If you purchased your home on an adjustable rate of interest over a certain period of time and now want to cut down your repayment period, refinancing might be your best option. Giving you a lower monthly payment and usually a flat interest rate, refinancing can help you cut down on years of interest payment.

Home Equity in 2012

With the crash of the housing market, many people have lost equity in their home because the house’s value has been depreciated.  With less home equity, you may not be able to get the loan amount you want, as lenders are being more conservative.  As home prices rise this should improve that status of home equity loans.  If you do not need the loan immediately, it may be in your best interest to keep accruing home equity by paying your mortgage until your home begins increasing in value.  The more home equity you have will show lenders your responsibility as a borrower and will help when applying for other loans, such as a small business loan.