Writer Dan Ackman notes in an article at www.forbes.com that a recent report by Goldman Sachs shows “in 2004, Americans withdrew $640 billion in equity from their homes--by selling them, taking home equity loans or by refinancing. This was twice the total of 2001, showing that cash-outs have been rising even faster than home prices, which is very fast indeed.” No doubt about it, Americans are using their equity!
The home equity process is streamlined these days as more and more consumers utilize their computers in acquiring loans. Information is limitless on the internet with websites such as www.about.com and search engines allowing consumers to answer their questions with a few keystrokes. Gone are the days of going from bank to bank to find the best rate and product. Loan applications now start online. There’s no time better than the present to take a closer look at how equity loans work and how to make your equity work for you.
What is a Home Equity Loan?
Equity loans are 2nd mortgages that are secured by the value of your home. Today you can get a 2nd mortgage without having to refinance your current mortgage. The amount of equity available to you is based on the loan to value ratio, which is the value of the loan against the fair market value of your home. So a loan of $65,000 on a $100,000 home has a loan to value ratio of 65 percent. The standard ratio is 80%, but some lenders have loans with a loan to value of 100% or even 125%.
There are two types of these second mortgages. You can either get a home equity line of credit (HELOC) or a home equity loan. An HELC works much like a credit card. It’s a revolving line of credit that can be paid off and used again. Equity lines of credit however, have a variable interest rate. Home equity loans on the other hand, involve getting all of your cash out at once and have a fixed interest rate. These work more like a standard loan.
Are Second Mortgages Right for you?
Home equity loans are considered as secure as a primary mortgage and usually the home equity rate is lower rate than credit cards and auto loans. This lower rate can make an equity loan a good choice for home improvement financing, loan consolidation and tuition expenses. The lower rate can mean monthly savings if you consolidate your debt. The interest can also be a tax deduction. Depending on your situation, this savings may make a home equity loan a good choice for you.
Home equity terms vary depending on the product. They will also depend on your credit score. Good credit will give you more options than bad credit. Home equity loans also have varying costs. There may be closing costs, appraisals, credit reports and points you will need to factor in to the cost of the loan. You should also be aware that if you refinance your existing first mortgage, the lender that holds the second mortgage must sign a subordination agreement, or the loan must be paid off with your new mortgage. The best loan for you will depend on your situation. If you know how your equity loan works, you can make sure that it works for you.
Rebecca is a free-lance writer and author of nine books on a variety of subjects. She is also a regular contributor Desert Magazine.
To get learn more about home equity loan programs, please check out the Home Equity Loan Center. To get more useful tips and information about second mortgage loans for people with all types of credit, please visit Second Mortgages & Equity Credit Lines.
