A home equity loan is a mortgage.
Home equity loans are essentially second mortgages and even
people with low credit scores can be approved for an equity loan.
It is secured by the equity already accumulated in a property.
Home equity loans are used to pay for home improvements, like
adding additional bedrooms and remodeling kitchens or bathrooms.
Equity loans can also be used to finance projects that increase
the value of the home, such as building a pool, a guest-house
or doing landscaping. Home owners with substantially large equity
accumulated in their homes can use those loans to pay off cars,
card debt or to consolidate different types of high interest
debts into one loan. Those who have only some equity in their
homes can still get equity loans, assuming that they have no major
Home equity loans can save on taxes.
In most states, home equity loan interest is tax deductible,
usually up to $100,000. Even paying off low interest debt (student
loans for example) with a home equity loan can save a lot of money
on taxes over the years.
Borrowing up to 125% of the home value.
In the last few years, home values in many parts of the country
have increased dramatically and home equity loans have become
a growing and very lucrative business for banks. Both competition
between lenders and fast appreciation of real estate values have
created conditions allowing most home owners to obtain an equity
loan in the amount larger than the market value of the property.
However, how big the equity loan can be depends on the following
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- the state where the property is located (in some states loans
cannot exceed the home value).
- credit score.
- purpose of the loan.
Home equity loans and balloon payments.
A balloon payment is a term describing a substantially larger
last payment in relation to monthly payments. Some lenders include
a balloon payment in their home equity loans, which should be
called a “one lump-sum payment.” It can exceed the
periodic payment by 20-30 times or more. It is best to
avoid a balloon payment and get a home equity loan with the same
payments for the entire life of the loan.
See also: mortgage
home loans, home
loan shopping, why
Related topics: home
equity loan tax savings