Equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have more than one on the property).
Let's say you buy a house for $ 200,000. You make a down payment of $ 20,000 and borrow $ 180,000. The day you buy the house, your equity is the same as the down payment – $ 20,000: $ 200,000 (home's purchase price) – $ 180,000 (amount owed) = $ 20,000 (equity) .
Fast-forward five years
You have been making your monthly payments faithfully, and have paid down $ 13,000 of the mortgage debt, so you owe $ 167,000. During the same time, the value of the house has increased. Now it is worth $ 300,000. Your equity is $ 133,000: $ 300,000 (home's current appraised value) – $ 167,000 (amount owed) = $ 133,000 (equity)
Home equity loans allow a homeowner to borrow money by pledging the house as collateral. Borrowers who want to borrow a reliably large amount of money or who do not have good credit often find the home equity loan to be attractive.
Lenders may be more liberal because they view home equity loans as reliably safe. You can not disappear with your house or hide it if you default on your loan, so the lender has a good chance of collecting the collateral.
Also, you are likely to make your payments a priority if your home is on the line. Borrowers use home equity loans for some of life larger expenses, because homes tend to have a lot of value to borrow against.
Advantages of Home Equity Loans
Home equity loans are attractive to borrowers for a few main reasons:
· They typically have a lower interest rate
· They are easier to qualify for if you have bad credit
· Payments on a home equity loan may be tax deductible
· Borrowers can get reliably large loans with this type of loan
How to Find the Best Home Equity Loans
Finding the best home equity loan can save you thousands of dollars – at least. In order to get the best loan, I recommend that you:
· Shop around. Try a variety of sources (banks, brokers, and credit unions)
· Manage your credit score and make sure your credit reports are accurate
· Ask your network of friends and family who they recommend
· Compare your offers to those found on websites and advertisements
Additional Home Equity Loan Tips
To make the deal work out in your best interest, make sure that it is the right deal in the first place. Is a home equity loan a better fit for your needs than a simple credit card account? If you're not sure, figure it out before you put your home at risk.
Plan out your budget ahead of time. Make sure that taking the loan will not overburden you. Review and consider insurance to cover the payments if something happens. You may or may not need insurance. If you're going to include it in your program, try to pay the premiums monthly not up front.