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Home Equity Loans

Home equity loans allow you to borrow money by using your home’s equity as the collateral. The home’s equity is the difference between the worth of the property against what you own in mortgages.

For example, if you buy a house for $100,000 and made a down payment of $10,000, you borrow the remaining $90,000. On the same day you pay the down payment, your home equity becomes the same. The $90,000 is the amount owed and the $10,000 is the equity.

Assuming that you paid $15,000 in five years, you owe a remaining $75,000. During that timeframe, the value of your home increased to $200,000. Your equity is now $125,000 because $200,000 (the home’s current value) – $75,000 (amount owed) is equal to $125,000.

The home equity loan is a second mortgage. It allows you to spend your equity in college education, home improvement, or any type of expense. There are actually two types of home equity debt including the 'home equity loan' and the 'home equity lines of credit'. The home equity loan provides a one-lump sum that is paid off with fixed interest. Meanwhile, the home equity line of credit has a revolving balance. It enables a borrower to get a loan up to a certain amount during the duration of the loan. You can withdraw money when you need it during that timeframe.

Protect Yourself When Taking Out Home Equity Loans

If you plan to take out a home equity loan, it is important to protect yourself against improper lending practices:

Don’t:

·         Sign any document that has blank spaces that can be filled in after you sign.

·         Let the lender pressure you into signing anything.

·         Agree to a home equity loan that includes extra products or insurance you don’t need.

·         Deed your house to anyone.

·         Take the loan if you don’t have sufficient income to pay for it.

Do:

·         Ask if credit insurance is required for the loan.

·         Keep records of what you’ve already paid.

·         Read the contract and the terms correctly.

Further Reading:

Federal Reserve Board

Home Loans: Do’s and Don’ts

Mortgage Loans: Home Equity

HELOC

Investopedia: The Home Equity Loan

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