Home Equity Loan

A Home Equity Loan Offers Some Fast Cash

There are a number of reasons to take out a home equity loan. They usually involve the need or want for some extra money. Some of the better reasons are to make improvements to the home that will increase its resale value and/or give the owner some additional amenities. For example, one of the most popular upgrades in today’s market is to build a luxurious master bathroom. Homeowners sometimes use a home equity loan to start or build a small business, continue their education in order to increase their earning potential, buy an investment property or start a college savings fund for their kids. Currently many people are borrowing more so they can pay down their out-of-control credit card debt.

Equity is the amount of money available because the homeowner has been paying down the mortgage or the house appreciates. It’s the difference between what he or she owes and what the home is worth. For example, let’s say someone purchases a home for $300,000. They make a down payment of $50,000 so they actually borrow $250,000. Each month they make payments, some goes to the principle and some to the interest. Over the years imagine they’ve paid $80,000 against the principle, so the amount owing is $170,000. In the meantime the house has appreciated in value. In order to get a home equity loan the owner needs another appraisal and learns that the home is now worth $350,000. By subtracting the amount owed ($170,000) from the value ($350,000) he learns he has $180,000 in equity, which would be the limit to the amount he can borrow.

Sound like free money? Wait there’s more! When the lender writes the new mortgage, which is what they do with a home equity loan, the homeowner is actually borrowing $350,000, the amount the home is now valued at. Although they do get to use the equity of $180,000, they’re still carrying a hefty mortgage. Since the lender owns the deed to the house, if the owner defaults, they could lose their home.

The real estate market is in constant flux, due to varying interest rates and the increase or decrease in housing values. These days in most places housing prices are continually rising. Even if interest goes up considerably, many financial experts think that homes will keep their high values. During times when interest rates spiral downward, many people take out home equity loans to refinance at the lower rate. They typically use the money to buy investment property to hopefully sell for profit at a higher price, or to improve the present home and sell it for more than the second mortgage (home equity loan).

The trick of course is to make your home equity loan profitable. That’s unlikely to happen when the money is used to consolidate other debt. It’s a relief to eliminate a number of creditors, but it’s still borrowed money. Hopefully if this is the only recourse, the homeowners will learn a lesson and improve their habit of building debt.

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