Most Important Things to Know About Home Equity Loans

Most Important Things to Know About Home Equity Loans

A home equity loan is where the borrower uses the equity in their home as collateral to borrow against. The most common use of a home equity loan would be for remodeling projects or additions to a home putting in a pool or put in a skylight redoing a master bathroom or even closing in the garage into a bed to a bedroom. The list could go on the second major use of a home equity loan.

It would be for large purchases buying new appliances for the kitchen. Starting a small business borrowing to pay for your student’s college education or paying off your own student loans or even paying down high-interest credit cards. No matter what you decide to borrow a home equity loan. The most important thing to remember is that it's an investment you want to borrow it for needs. Not once things that will be substantial to your lifestyle things that, will add equity your home in the long run.

Most Important Things to Know About Home Equity Loans
Most Important Things to Know About Home Equity Loans

How Does Home Equity loan Work?

How does a home equity loan work?  It's typically called a home equity line of credit and you may hear it in the industry called a HELOC. Which is the acronym for a home equity line of credit? A home equity loan is a line of credit based on the equity that you have in your home.

It's very similar to a mortgage and it has one main difference in that. You can pay it down and redraw down on it such as a credit card. A home equity line of credit is meant for you to want to do a kitchen remodel and you've got $200,000 of equity in your home. But, that won't pay for your kitchen remodel.

A bank says to you we will give you a $50,000 line of credit on the equity in your house. That you are then going to pay back with a certain interest rate. You get a $50,000 home equity line of credit. You remodel your kitchen and then you pay it down. And then you decide, you want to do the bathroom for the first 10 years of it home equity line of credit. You can run it up again to do your bathroom, just like a credit card. That's different in that with a mortgage. You can pay it down earlier but, you can't get more money and run it back up.

Is a Home equity loan or Line of Credit Right for You?

Sometimes your house is more than just a home. It can also help fund your family's next big adventure. How much of your home's value? You can leverage depends on the amount of equity. You've built your home equity is defined first and foremost by the value of your home. This amount is weighed against the amount. You owe on your mortgage the less you owe the more home equity you have. And if you've built enough home equity lenders may be willing to give you a home equity loan or line of credit.

For example:- Anne's lender has a maximum loan-to-value ratio of 80%. Which means she could borrow up to 80% of the value of her home. If Ann's home is valued $200,000, she can borrow up to one $160,000 or 80% of its value. If she already owes $120,000 on her mortgage, that means she could potentially tap into $40,000 of home equity. She could use these funds to meet her family's goals such as renovating their home, starting a business or paying for college, what could you do with the equity in your home.

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