To define a few terms, equity is the difference between your home's appraised - or fair market - value and your outstanding mortgage balance. A loan refers to the amount of money you borrowed from a lender providing you with the mortgage. So basically, the idea with home equity loans is to borrow against your home's equity as a very effective way to get some things you need at a good price.
Homeowners, mostly the elderly, and people with low incomes or with poor credit must be very careful and wary when borrowing or having a loan based on their home equity. This is because there are some lenders who target these borrowers and exploit those who innocently may be placing their house at great risk. Take note of this factor and be sure to educate yourself about home equity loans.
Why Have Home Equity Loans Become So Popular?
Borrowing against the value of a home has become increasingly popular. There are two key reasons for this surge. People are taking advantage of low interest rates and tax deductibility.
The tax changes that occurred in 1986 have eliminated deductions for most consumer purchases. As a way to get around these changes in tax, consumers began borrowing up on their home value in order to make purchases. Home equity loans thus became a method adopted by homeowners to buy goods and still get a deduction.
Here is an example of how home equity loans are being used today.
Let's say that you bought your home for $95,000 and made a 20 percent down payment of $19,000. To pay the remaining $76,000, you then took a first mortgage. On the day you closed on your home, you automatically had 20 percent equity. As you pay off the principal, you gain equity and your home grows in value.
Now, let's say that you have paid $12,000 toward the principal and your property. Remember that you property was valued at $95,000 when you bought it. Now, since you have made the payment on your principal, your $95,000-home is now worth $115,000. Your beginning equity ($19,000), plus the principal you have paid ($12,000) and the increase in your property value ($20,000) gives you $51,000 in equity.
Banks and borrowers both benefit from home equity loans. For that reason, interest rates for home equity loans are lower than for other loans.
Like most things, home equity loans also have their downsides. The disadvantage to home equity loans is that if you default on the loan, the lender could foreclose on your home. For this reason, home equity loans are statistically most suited to stable, middle-aged borrowers.
Home Equity Loan - Beware Of Scams
A home equity loan permits one to borrow a certain amount of money, using the equity of your home as collateral.
Homeowners, mostly the elderly, and people with low incomes or with poor credit must be very careful and wary when borrowing or having a loan based on their home equity.
4 Home Equity Loan Factors To Watch Out For
1. Equity stripping. Careful! This home equity loan lender has the possibility of stealing the equity that you have built up.
2. Balloon payment (hidden terms) with home equity loans. Examine meticulously the terms of the loan. Your monthly payments can be lowered, as the lender is offering, that you pay back only the interest. You will be facing foreclosure if you can not pay the principal with this type of home equity loan.
3. Loan Flipping. This is when the lender inspires you to repetitively refinance your loan and to borrow more and more money. A certain lender offers you refinancing, and uses the availability of extra money, declares that it's due time that the equity you built starts "working" well for you. After a few payments, the lender then offers you a larger loan for a family vacation. You accepted the offer and the lender then refinances your original loan and gives you the additional cash.
4. Credit insurance packing. In this case, the lender will add credit insurance to your home equity loan that you do not necessarily need.
by Dean Shainin
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