There will be times when you need extra funds to do home improvements, purchase a car, or go on a vacation. A homeowner who does not want to use his credit card or tap into his savings can use the equity of his home.With equity loans, you tap into the value of the home and place the home as collateral for the loan. Equity is the value that you have in your home computed by market value minus what you owe on the home.It is wiser to get an equity loan rather than go for consumer loans. Home equity loan interests are tax deductible and the homeowner has several options when getting a loan.A homeowner must remember though that equity loans are against the mortgage. Non-payment of the loan can lead to someone losing his home.Types of Equity Loans The most common equity loans are the home equity loan and the HELOC or home equity line of credit. Here are the main differences:
Equity loan – This loan involves a closing cost and is given in lump sum. The interest rate is often fixed for the life of the loan and is also tax deductible.
HELOC- Closing cost is not an issue for HELOCs. The money is dispersed as desired by the borrower. The interest paid is also tax deductible but the rates may vary according to market trends.
There are other options like taking a hybrid HELOC or equity loan, piggy backing, reverse mortgage, cash-out refinancing.
Hybrids are variants of HELOCs and equity loans. The terms highly vary and it is advisable to consult the lender for the exact terms of the loan.
Piggy banking is taking concurrent first and second mortgage usually to avoid private mortgage insurance in place of a down payment. Usually, the first takes 80% of the loan and the rest is for the equity.
Reverse mortgage is designed for the elderly population and enables them to tap into the equity of their homes right now.
Cash-out refinancing is redrawing a larger refinancing amount against the home. It will be wise to take this loan if you are getting a lower interest rate, shorter loan term, and if the loan can roll in the closing cost so you don’t have to shell out cash.
What to Do Before BorrowingIf you are decided to tap into the equity of your home, here are some reminders that may help you out:
Financial Adviser- You may consult financial advisers to make sure that you are entering a right deal. They can help you assess your current situation and advise which will be the best way to go.
Compare and Shop- Homeowners may consult their primary lender and see if they can offer something better. Shop around different lending institutions to see which one can give you the best deal that can save you hundreds or even thousands of dollars.
Know the Terms – HELOCs for example are published with teaser rates that increase as the loan matures. It is best to know the details of the terms of the loan. Remember that a delinquent loan may lead to losing your home.
Know your Borrowing Rights- The federal government has required lenders to fully disclose the terms of a loan to a borrower. This includes the interest rates, closing costs, pre payment, etc. There is also a law that allows you to cancel a loan within three days. This is known as the right of rescission.
The rule of thumb for taking out loans is to know the right reasons for that loan and knowing how to fulfill your responsibility of paying it back on time.