There are periods in one’s life when home equity loans come in handy. Consider this situation:
- You have a house that’s worth $250,000.00;
- You built equity in that house worth $130,000.00 (this means you’ve paid $130,000.00 of the $250,000.00 original mortgage amount leaving you with a $120,000 outstanding balance);
- Somewhere along the line, your basement developed problems and has to be renovated because the heating and cooling systems are not working efficiently and some walls and columns have to be knocked down. Total cost is $25,000.00;
- At the same time, your son decides to go to med school and will be needing financial help outside of his scholarship funds. Estimates are that for nine years he will need at least $75,000.00;
- The combined total of the basement and your son’s education comes to $100,000.00
What are your loan options?
- You can sell your house and let the buyer repair the basement himself;
- Tell your son to give up his dreams of becoming a doctor and be a landscape artist instead;
- Sell your wife’s art collection which should fetch about $150,000.00. That should neatly cover your basement and your son’s aspirations, plus have leftover cash to possibly finance a trip;
- Request the credit card company to increase your limit to $125,000.00;
- Since your son is going away to university, rent his bedroom out;
- Borrow $100,000.00 from friends and family;
- Take a second job; your wife can do the same;
- Write a novel and hope it tops the bestsellers list;
- A friend suggested speaking to your bank about a home equity loan.
Which option seems to be the most attractive to you? Your heart would bleed if you sell the house (it’s a great asset and will serve you well when retirement comes around). Your son might resent you the rest of his life if you don’t help him become a doctor (besides in your old age, you could use a doctor in the house). Your wife has worked hard to build up her art collection and there’s the possibility that she’d rather divorce you than sell her most precious possession.
Requesting your credit card company to up your limit to $125,000.00 means you could be paying through your nose on interest charges alone. Renting your son’s bedroom out is a worthwhile option to consider, except he’s made it clear that he intends to come home during the holidays and may need to live with you after med school just to get his finances straight.
Taking a second job would only generate stress which in turn could elevate your blood pressure. Writing a novel? You never fancied yourself a writer because you always had a secretary who did your correspondence for you. Even your Valentine cards to your wife are written by your secretary…so it looks like that the…
Home Equity Loan is One of Your Best Options
Anyone who looks at your situation and knows about home equity loans will readily say the same thing. Home equity loans are one of the best bets around for a homeowner who has built equity in his house and needs some cash.
Millions of homeowners who experience a financial crunch at some point in their lives have asked their banks for home equity loans that will help them weather a monetary crisis. If you need money for major renovations, help your children with their education, pay for assisted living facilities for your aging parents, or just to consolidate various loans in your portfolio, home equity loans are the smart way to go.
Why don’t you speak to your lending officer today? You might be surprised at how much money you can borrow at very low rates. Home equity loans are popular because of their low rates. The reason the rates are low is the bank knows they can get to your house as collateral should you default.
Home equity products are packaged so that borrowers can avail of a privileged low rate without access restrictions to credit when needed. Plus the bank won’t dictate how you are to use your money. That’s entirely your decision. Some banks can lend you as much as 75%-80% of the appraised value of your house, and even up to 90% if you take out mortgage insurance against default.
Be careful: banking terminology can be confusing to first time borrowers. There is a difference between a home loan and a home equity loan. Don’t confuse your banker by telling him you need a home loan when in fact it is a home equity loan you need. A home loan is a loan you apply for to purchase a house. A home equity loan is a loan you borrow against the equity you’ve built in your house, assuming you have built equity. We don’t think it is possible to apply for a home equity loan right on the day you moved to your new house, because you haven’t paid enough into the mortgage. If you have a $100,000 house and you’ve already paid some $20,000.00, then it might be possible to ask your banker for a home equity loan if necessary (although we think this is still a fairly low amount). Since the amount you can borrow is calculated on the basis of the appraised value of your house, your banker might be willing to offer you a home equity loan even with only $20,000.00 equity.
It pays to shop around for home equity loans. You need not take one out with your original mortgage lender. If you can find one with flexible terms and conditions, then go for it. Read the fine print though. And please, don’t get carried away. People who come upon a large amount of money suddenly dream bigger. Instead of the basement renovation that they originally took out the home equity loan for, they throw in a cruise and a car. Your banker will definitely not object – the money is yours and you can do anything with it – but that money is still a debt. Make that DEBT!
Home Equity Loans not the Same as Home Equity Lines of Credit
It is also important to know the distinction between a home equity loan and a home equity line of credit (HELOC). A report said that about 7 million Americans applied for home equity loans in the past year. But the needs of those 7 million are not all the same. Your needs could be unique so think about the pros and cons before you sign those loan documents.
A home equity loan and a home equity line of credit are like second mortgages; the main difference being that in a home equity loan, you receive one lump sum. In a home equity line of credit you get a line of credit that you can tap whenever the needs occur. Another difference is that the interest rates may vary. For the first type, you may get a fixed interest rate but when you take into account fees and closing costs, the “low” interest rate you thought you were getting may not be that low after all. Home equity lines of credit are usually not subject to hefty fees or closing costs but your interest rate is variable, which means you have to go with the flow – otherwise known as the prime rate.
We reiterate: read the fine print. This is critical especially if you are applying for a home equity loan and the original mortgage isn’t paid in full yet. You’ll come across legalities such as subordination clauses that you should clarify with your lender.