Home equity loans take advantage of the equity in the borrower's home; equity is the difference between the fair market value of the home minus the current mortgages on the property. The loans may take different forms, a home equity line of credit in which case the money is available but no interest is charged until the money is used. Another choice is a home equity loan where all the funds are released up front at the time of closing. The loans may be for a fixed period of time at a fixed rate or an adjustable rate (ARM). With a fixed rate mortgage, the interest is the same rate for the period of the loan. Adjustable rate loans usually have a lower initial rate but are tied into an index (prime interest rate) plus a point or two after the initial lock in rate period.
1- They can be used to consolidate high interest credit card debt. The maximum rate on adjustable home equity loans are usually below the credit card rates. Credit cards can have interest rates as high as 21%. The maximum on ARM home equity loans is between 11% and 12%.
2- The funds can be used to reduce or pay-off the balances of negative amortization interest only second mortgages. In a negative amortization the minimum payment of interest is less than that earned by the lender and the unpaid interest is added to the mortgage.
3- The home equity loan, if used to consolidate bills, will provide lower monthly payments.
4- The interest rate on a home equity loans is usually less then the rate on an unsecured equity loan. In an unsecured home equity loan, the total loan exceeds the fair market value of the property. The lender will require a higher credit score and interest rate.
5- Home equity loans can be used to pay off revolving credit debt.
6- The borrower can access cash which may be used for any purpose, home improvements, education, vacations, etc.
7- The interest on home equity loans is almost always tax deductible. The amount of the tax deduction depends on the borrower's tax bracket. A tax professional should be consulted to determine whether or not the loan is deductible.
When you compare home equity loans make sure you are comparing fixed rate loans with fixed rate terms. And if you are comparing home equity credit lines, then remember to compare the prime rate margin after the introductory period. Keeping your loan shopping on fair playing grounds for the brokers and lenders will help you get a great loan within a reasonable time-frame.
Mary is published web author for many mortgage and real estate articles. She writes articles for people all across the country in an effort to increase their awareness for home finances. You can read more of her home equity lending articles online at BD Second Mortgage & Home Equity Loans. To get more equity loan advice & finance tips, please contact the loan team to learn more about program updates and the approval process for home equity lines of credit and 125% home equity loans.
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