The equity you've worked to build up on your home is a valuable resource, and home equity loans are one way you can let this resource benefit you. Equity is the difference between the value of your home, and the amount of mortgage you still have to pay off. For example, if your house is worth $150,000, and you have $100,000 left on your mortgage balance, you have built up $50,000 worth of equity. The more equity you have, you will qualify to borrow more money in home equity loans.
Home equity loans use this difference to help you get the money you need at a low interest rate, which can be used as a money-saving tool. You can consolidate your debt with home equity loans. Most credit cards have APRs of twenty percent or more, while home equity loans almost always have a rate below 10%, often much lower, varying, of course, according to credit. In order to get a better idea of what APR home equity loans will offer you, get a credit report from one of the main credit reporting agencies; Equifax, Experian, or TransUnion.
There are two main kinds of home equity loans; set term home equity loans, and revolving lines of credit. Term home equity loans work like typical loans. You borrow a set amount, have a fixed interest rate, and pay a certain amount monthly.
A HELOC (home equity line of credit), on the other hand, is more like a credit card than traditional home equity loans. You can borrow up to a certain amount for as long as the loan lasts. If you borrow to the limit, but pay some of it back, later you may borrow what you had earlier paid back. Once the loan expires, though, the amount must be paid in full. Another potential downside to a HELOC, is that the interest rate is variable, going up or down with the market.
When you've researched home equity loans, and are ready to take one out, the first place you should consider going is your current mortgage company. Not only does this save you a lot of paperwork, and help you get your loan approved faster, you might also be able to get a better deal. Ask them about savings on closing costs, or any other special offer on home equity loans for current customers.
Before you get your loan, make sure you know ALL the fees you will be paying. Home equity loans can have many fees. The following are some fees you may be facing.
- Closing costs. The closing costs for home equity loans are usually 2-5% of the loan amount.
- Application fee. This covers the processing for home equity loans, and may be non-refundable if the loan is denied.
- Annual maintenance fees. If you are charged one, it is usually below $100.
- Cancellation fee. May apply if you cancel the loan early.
Despite the fees, home equity loans are one of the least expensive ways to borrow money. Their interest rates are substantially lower than credit cards. But they aren't for everyone. If considering home equity loans, be sure you can meet the payments, or you risk losing your home. But when used well, home equity loans can save a lot of money by giving you the low rate, and even to pay off high interest rate debt. If you need the money, home equity loans may be a great option for you, just keep potential consequences in mind when making your decision.