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Of the three basic needs of humans?food, shelter, and clothing?it is only the second that gives us access to easy cash through home equity. Aside from the sense of accomplishment that comes with being able to call a home your own, equity is the reason why it?s better to buy a home through a mortgage loan than renting forever.
Home equity loans allow you to borrow money by tapping in to the equity of your home. This is also known as a second mortgage and is usually used to finance home repairs, children?s college tuition, or pay off large medical bills. It is also used by those who want to pay off staggering credit card debt. The reason for this is because although the interest rate is usually higher than that of first mortgages, it is lower than that of unsecured loans like credit cards. Another reason why a home equity loan appeals to many borrowers is that the interest charges up to $100,000 can be taken as an itemized deduction in your federal income tax returns.
In a home equity loan, the bank usually allows you to borrow up to 80 percent of the equity of your home. Some lenders even grant a loan up to 125 percent of the value of the home. However, this requires higher fees and interest rates. To illustrate how much you can borrow in this kind of arrangement, let?s consider a hypothetical situation where you have taken a $200,000 mortgage for your home and paid $20,000 downpayment. At this point, your equity is equal to the downpayment of your home which is $20,000.
After five years, the value of your home is appraised at $300,000 and you have slashed down the principal further by paying another $20,000. So at this stage, the principal balance on your mortgage is $160,000 ($180,000 remaining balance after the downpayment minus the $20,000 additional payment on the balance). Your equity now is the present appraised value of your home ($300,000) minus the remaining balance ($160,000). Thus, your equity is $140,000.
If you wanted to borrow $40,000 from your equity for a medical emergency, then you will have to see if that falls within the 80 percent limits of your equity. So your combined mortgage balance should you go through with this loan becomes the original balance ($160,000) plus the home equity loan you wish to take ($40,000). The total then is $200,000 which is less than 80 percent of the current value of your home, making your intended $40,000 home equity loan possible, provided that you meet the lender?s other requirements.
There are two kinds of home equity loans: 1) Fixed Rate Home Equity Loans and 2) Home Equity Lines of Credit (HELOC). While both have differences which we will discuss below, they are similar in the sense that the terms usually range from5to 15 years. They also have to be repaid in full in the event that the property in which they are borrowed against gets sold.
A fixed rate loan is a home equity loan that gives a lump-sum amount to the borrower. This must be paid back over a period of time at a pre-agreed rate of interest which will remain the same over the life of the loan. The interest begins right after the money is released by the bank.
A HELOC is a newer type of home equity loan which works in a similar manner as that of other types of personal loans. Some HELOC lenders even provide their borrowers with a credit card. In this home equity loan, the borrowers are pre-approved for a particular spending limit, allowing them to withdraw money when they need it. The payments per month are varied since the HELOC is tied to the current interest rate. Like a fixed rate loan, the amount must be repaid once the term of the loan expires.
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Home Equity Loans and Home Equity Line of Credit (HELOC) Explained (4 part series)
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Tagged with: College Tuition ? Credit Card Debt ? Downpayment ? Equity Line Of Credit ? Federal Income Tax ? Federal Income Tax Returns ? Food Shelter ? Heloc ? Home Equity Line ? Home Equity Line Of Credit ? Home Equity Loan ? Home Equity Loans ? Home Repairs ? Hypothetical Situation ? Income Tax Returns ? Itemized Deduction ? Principal Balance ? S College ? Second Mortgage ? Unsecured Loans
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