Home Equity Loan Tutorial
As a homeowner, you may be able to borrow against the equity in your home. The equity is the difference between the property's market value and the outstanding loan balance. These types of loans have become increasingly popular because the interest rate is usually lower when you borrow against real estate. And the interest on a home equity loan is mostly tax deductible (always consult with a tax expert before deducting any home equity interest on your income tax return).
Home equity loans usually come in two varieties: the traditional "second mortgage," and a home equity line of credit. Here is how they work:
Second mortgages - Just like your first mortgage, it is a loan that uses your house as a guarantee that you will make your payments. While there are many advantages of getting a second mortgage as a home equity loan, you need to remember that you are exposing yourself to the risk of foreclosure if you should run into any unexpected financial problems, such as a job loss.
Home equity line of credit - These types of loans have increased in popularity since the late 1980s, when the deduction for interest on consumer loans were phased out by the Internal Revenue Service. They work similarly to a credit card or revolving line of credit. Your bank provides you with a checkbook that is used to draw against your line of credit. You can write checks for major purchases, such as a car, or medical expenses, or just draw out some cash and go on vacation. Equity lines of credit should be used wisely, because your home is on the line. If you fail to repay your equity loan, you may end up losing your house.
If you are considering taking out a home equity loan, shop around and look for the best rates and repayment plans that are available. And remember that you are putting your home on the line, so treat a home equity loan with the respect that it deserves .
Home Improvement Loan Facts
Who qualifies for a loan?
Home equity loans are usually made to consumers who have less-than-perfect credit records that keep them from qualifying as A+ credit risks. A non-prime borrower may also be so categorized because of the size of the requested loan or due to other characteristics such as being self-employed or financing a non-conforming property.
What are the characteristics of the home equity market?
The home equity industry is highly competitive, with approximately 35,000 lenders. More specifically, the industry is served by approximately 23,000 mortgage brokers, 5,000 banks, 5,000 credit unions, 2,000 thrifts, and 500 finance companies.
What are the forces behind the relatively recent increase in the popularity of home equity loans?
Four factors: homeowners have substantial equity in their homes; a healthy secondary market for securitized loans is making more capital available; tax laws have been amended so that mortgage interest is one of the few remaining types of tax-deductible consumer debt; and a growing and diverse consumer market - almost 40 percent of U.S. citizens from all walks of life do not meet "prime" lending criteria.
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