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A Home Equity Loan - Is It For You?
Home equity loans are often touted as being the solution to so
many things - giving you access to money for home repairs or
improvements, a way to consolidate debt, finance a sudden family
emergency, or even as a way to start an investment portfolio.
There's a lot to think about, though, before you go and sign up
for the first home equity loan you see.
A home equity loan is like a second mortgage on your home. If
your home is currently worth $130,000, and you have a mortgage
against it for $70,000, then you have $60,000 of equity
available. Some home equity loans may allow you to borrow up to
80% of your home's value, others may go higher in special
circumstances. In this example, you would be able to borrow
another $34,000 as a home equity loan and still have only
borrowed 80%.
So the first step is to get a reasonably good idea of what
your home is worth on the market. Your friendly realtor may help
with this, but be aware that sometimes they can inflate the value
in the hope of getting your business. You can also look at what
price similar houses close by have sold for. Or you can pay a
qualified valuer to assess your home.
Now you have a starting figure, you can work out how much
equity you have in your home. The other important figure to work
out is how much you need for whatever purpose you have in mind.
Hopefully that works out to be less than the equity available!
It's even better if it's less than 80% of the available
equity.
At this point it's important not to get carried away. It can
be all too easy to say, well, I have $50,000 available and I
really only need $30,000 to complete the repairs, so why not
borrow $40,000 and blow the rest on a holiday? Remember - the
more you borrow, the more it will cost you in repayments. It's
very easy to borrow too much, only to find yourself struggling to
meet the payments and maybe even losing your home.
You also need to decide what type of home equity loan you
want. There are two main types - a closed end loan and a line of
credit. A closed end loan is basically the same as a standard
home mortgage - you borrow the amount for a set period of time,
and make payments over time to gradually pay off the balance.
A line of credit, on the other hand, is like having a credit
card with a big limit. Some banks will require you to make
minimum payments each month, others only require payments if
you're at your limit. Either way, the loan will only be for a set
period of time, and at the end of that you will either have to
extend the time period or refinance the loan with another lender.
This type of facility can be useful if you're disciplined with
your money, but if you're the type of person whose credits cards
are always at their limits, it may not be a good idea at all to
have ready access to such a large amount of credit.
Next, you need to work out how long you want to borrow the
money for. This will vary depending on how much money you are
borrowing, the type of home equity loan and how much you can
afford to pay. There are lots of good mortgage calculators online
that can help you to work this out. If borrowing the money over 5
years for a closed end loan means you won't be able to meet the
payments, then see if spreading the loan over 10 years becomes
more affordable for you. You will pay more in the long run, but
at least you won't default on your loan.
When you know what you want, it's time to go and find it! It
may be worth starting with banks recommended to you by friends
and family - at least they'll be able to give feedback on their
experiences. You can also shop around online, looking for the
best deal.
Finally, when you have chosen the loan you want and are ready
to proceed, do two more things. Firstly, check for fees. Banks
are aware of the need to be competitive, and will often avoid
charging up front fees for that reason. However it's amazing what
can be hidden in the fine print of a contract. So read any loan
documents thoroughly before signing. If you can, get the contract
explained to you by your legal advisor.
Home equity loans can be a wonderful tool when used correctly.
Do your homework first, find the loan that best matches what you
want, and go for it. Just make sure you don't over extend
yourself or sign documents that will give you nightmares
forever.
Copyright Felicity Walker 2005
Investing and finance are two passions of the author. To find
out more, check out http://www.homeequityloanzonecentral.com
for more information.
 MORE RESOURCES updated Thu. February / 09 / 2012
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A Home Equity Loan - Is
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Whether you are a first time home buyer or a happy home
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