Home Equity Loans

Home Equity Loans

In today's economy, many homeowners are taking advantage of favorable home equity rates as an alternative method of financing a large expense, such as a home remodeling project or college tuition. Home equity loans are based on the difference between the value of a home and the mortgage. For example, if you have a home appraised at $100,000 and have a first mortgage with an $80,000 balance, you have $20,000 equity in the property.

Homeowners know that a key benefit of owning real estate is that you own valuable asset that was purchased with a small amount of their cash (down payment). So as the home appreciates, so does your investment - as the appreciation value is now larger than the original down payment.

In a positive market and desirable neighborhood, for example, the property may increase 10 percent in the first year. So the $100,000 house is now worth $110,000. If the down payment was $10,000 (10%), the equity in the house would increase 100% — from $10,000 to $20,000. Great leverage - a growing investment!

Keep in mind that this leverage goes away if property values go down when you sell your home. If the property value dropped 10% instead of increasing, the house would sell for $90,000, making it difficult to break even.

Here are some key things that are good to know about home equity loans:

• Most home equity loans are variable interest rate loans, some may feature an attractive low introductory rate.
• Some home equity loans are fixed rate loans, locking the rate in for the term of the loan. However, they may be higher rates than a variable interest loan, as the risk is lower to the homeowner.
• Some home equity loans have a large, one-time, up front fee. Other fees may be closing costs, annual fees, or large balloon payments (at the end of the loan).
• Expenses you should expect to pay include an application fee, title search, cost of appraising your house, possible attorneys' fees, and points.
• Many home equity loans have variable interest rates, so when the interest rate goes up, so does your monthly payment.
• Ask the prospective lenders about other ongoing fees, such as a transaction fee - one that's charged each time you borrow money.
• There are three days you have to cancel the transaction, for any reason, but it must be done in writing.

Getting the best rate is an important step in obtaining a home equity loan. Use this handy form to get rate quotes from multiple lenders. Getting quotes from multiple lenders is the best way to get the best deal on your home equity loan.