Home Equity Loans

With the value of homes and properties generally increasing in most cases across the country, homeowners can take advantage and use home equity loans to finance large purchases that they might not otherwise be able to afford. College tuition for a son or daughter is one of the most sought out needs for funding, as is major home remodeling and a long list of other major expenses. Home equity rates have always provided homeowners an alternative method of borrowing money for large costs and are based on the difference between the value of a home and the mortgage balance.

Some examples of equity are: A home appraised at $150,000 that has a mortgage with a $110,000 balance has $40,000 equity, which can be borrowed on for things such as the college funding or home remodeling. A home appraised at $90,000 with a $45,000 mortgage balance has $45,000 equity. Sometimes, the amount of equity is not only based on how much the value of the home has appreciated, but how long the borrower has been paying down the principal, thus creating more equity and leverage. Owning real estate is usually a very good investment that creates a valuable asset, usually purchased with a small down payment. As the home appreciates, the investment appreciates-eventually, the appreciation value is larger than the original down payment, creating amazing leverage.

On the other hand, if the property value decreases, so does the leverage. An example of property appreciation would be if the property appreciated 15% in the first year. A $100,000 home is now worth $115,000. If the original down payment was $10,000, the equity increased 150%, giving the buyer leverage from $10,000 to $25,000! And, hopefully, growing! But the flip is also true. If the value of the property decreases 15% in the first year, the home is now worth $85,000 rather than the initial $100,000. This would be considered one of the proverbial “rock and hard places”, giving the homeowner a difficult time if needing to sell the property and trying to just break even. Leverage is everything in home equity and decisions must be carefully made before securing financing, whether it be for an initial home mortgage or a home equity loan. The best way to avoid disaster in investing in real estate is to do the most research possible before making a purchase.

Home equity loans require knowledge of several key points. First, most equity loans are similar to Adjustable Rate Mortgage loans (ARMs), as they are variable interest rate loans, but offer a nice low introductory rate. There are fees involved, such as ongoing transaction fees, which are charged every time money is borrowed on the note. Expenses, such as application fee, title search, appraisal fee, attorney fee and other should be considered in this type of loan also. Sitting down with the lender and going over each of these points (and more) is key to a successful and knowledgeable transaction. Overall, getting the best rate is most important, and lenders all around are competing aggressively to provide that.

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