Home Equity Loans
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A home equity loan allows a homeowner to borrow money against the value of the house they own, less any outstanding debt. In other words, homeowners can get a loan based on the value of their home. For example, if your house is worth $250,000 and your outstanding debt is only $200,000, you as a homeowner may be entitled to a loan in the amount of $50,000.
How Does A Home Equity Loan Work?
A home equity loan (HEL) is a type of secured loan, sometimes referred to as a piggybank loan, which permits the borrower to pledge the equity in their house as collateral for the loan. Common reasons and uses for this type of cash-out refinancing loan includes consolidating debt, making home repairs or upgrades, paying for a child’s education expense, automobile down-payments, to purchase luxury items, or even to pay medical bills. In most states it is possible to deduct the interest portion of the loan.
Because a home equity loan is a secured loan, if the borrower defaults on the loan, the creditor then takes possession of the home for which the home can be sold towards helping to satisfy the debt. The benefit of taking out this type of loan is that it can easily be obtained by homeowners with equity in their house, who want immediate access to funds for a one-time expense.
In many cases, when one chooses to take out a home equity loan, their consumption increases while net wealth declines; hence the borrower’s marginal propensity to consume from net wealth is a negative figure, one which can be correlated with housing debt.
When the borrower receives a cash-out loan, money is saved by refinancing to a lower interest rate. This type of loan, a home equity loan, differs from a home equity line of credit (HELOC).
One important issue associated with equity loans and the negative correlation between consumption and debt, is that when the “piggybank” runs dry, a liquidity-constraint, along with the increased need to match consumption with income, may cause serious financial concerns for the borrower.
What Should Homeowners Know Before Applying for A Home Equity Loan?
Before applying for a home equity loan, seek out the bank, credit union, or other lending institution that offers the most attractive annual percentage rate (APR) and can meet your particular needs. Carefully read the lender’s terms and conditions of the agreement prior to signing the contract.
Home Equity Loan Information that May Affect You
Enhance Your Home By Using Your Equity Wisely Says Informa Research Services – Consider home improvements that enhance your home not just during the hot summer months, but all year long. For instance, a pool may seem like a great addition to your backyard, but unless you live where it’s warm all year-round, it may seem like a waste of money to maintain once fall and winter roll around. Instead, replacing your appliances with energy efficient models or replacing insulation in your home may prove to be a better investment in your home.
When tapping into your equity, don’t forget that – just like any other loan – a home equity loan must be paid back eventually. Keep your project within budget and be smart when taking money out of your home.
The Cost and Benefits of a Reverse Mortgage – There are many senior citizens in the U.S. who have cash-flow and financial problems due to bad economy and lack of savings. Their capital investments as well as home value declined substantially during recent years. Many of those in this specific group are either retired or planning to retire soon. Many of them do not have much savings in their retirement accounts such as IRAs, 401(k), 403(b) and
pension. The social security does not provide them with sufficient funds to maintain their current standard of living, and the future of the U.S. social security system is subject to a great deal of uncertainty, considering high federal deficits and the increased number of aging population. Given the current state of the economy, some senior citizens or retirees are having a trouble with paying their bills, creating a liquidity problem.
New Loan Modification Applications Are Showing Strong Demand – Many of the factors that have disqualified homeowners from qualifying for a refinance (poor credit or no home equity) are not considered factors when applying for a loan modification. These new relaxed guidelines have made a significant impact in the amount of homeowners who are now eligible for help.
Additionally, borrowers who are in default or facing foreclosure can benefit as well because these programs are also designed to bring the existing mortgage back to a current status again.
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