Homeowners with equity in their houses can get a loan using that value as collateral against the loan. The equity is the amount of money invested in the house that is owned by the homeowner and not the bank. Equity also can be in the form of money invested to improve the house over and above the initial purchase price.
Effects
Since the house is being used as collateral on a home equity loan, the property can be sold to pay off the equity if the homeowner defaults on the loan. The amount of money available to borrow is based on a formula called a loan-to-value ratio and is based on the difference between what is owned on the property and what the property is worth.
Types
A home equity loan can be taken as a lump sum or as a revolving line of credit against which the homeowner can draw when the money is needed. Payments on a revolving line of credit vary depending on the amount loaned at any given time. A home equity loan can be taken if the homeowner has a fixed mortgage or an adjustable mortgage, report financial advisers at MortgageLoan.com.
Benefits
The main benefit of borrowing money through a home equity loan is that, unlike credit card debt or personal loans, money borrowed against the home is tax deductible. The interest on home equity loans usually is lower than on credit cards and unsecured loans. A home equity loan can be used to refinance a mortgage, but the new credit line does not pay for escrow, insurance and taxes, which then become the responsibility of the borrower.
Identification
While many lenders require an explanation for the loan, a homeowner can take out a home equity loan or line of credit for any number of reasons. Home improvements and repairs often are accomplished with home equity lines of credit. A home equity loan can be used to fund education, take a vacation, buy a car or consolidate other debts, report financial consultants at Chase.
Considerations
There are a number of rules regarding home equity lines that vary from bank to bank. Most lenders require the home to be the primary residence of the borrower. A loan application and home appraisal typically are required for a home equity loan. Borrowers also must be in good standing with other loans and meet various loan criteria the lender may have about credit scores. Fees on home equity lines vary as well. Some lenders charge closing costs on the loan, while others have an early payment penalty if the loan is paid off before the expiration date.
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