Many people start looking to home equity loans and lines of credit
as a way to pay down excessive debts, make improvements or
additions to their home, or pay for other large expenses such as
their children's college.
Before going the home equity loan route though, it's a good idea to
become more familiar with what these are, and how they work.
A home equity loan is a fixed rate loan that's based on how much
equity you have in your house. Equity is the the actual value of your
home, in other words: The difference between how much your
home is worth, and how much you still owe on the first mortgage.
It's the actual cash value you'd get from your home if you were to
sell it today at full market value, and pay off the remainder of your
mortgage with those sales proceeds.
To give you a simple example: Let's say you have a home worth
$200,000, and so far you've paid off $50,000 of the principal from
your first mortgage. That would give you an equity value of $50,000.
If you were to apply for a home equity loan, you'd normally be able to
request up to $50,000 based on that example.
Sometimes home equity loans are referred to as a second
mortgage, and the amount you can borrow is fixed based on the
amount of equity you have at the time you take out this loan. Home
equity loans are usually paid back within 10-15 years as well,
instead of the 30 year payback plan most first mortgages have.
Payback periods and interest rates for home equity loans will vary
from one lender to another, so it's always best to check current local
and national rates before committing to a specific lender.
Now another way to use the equity from your home to get additional
cash is to apply for a home equity line of credit, or HELOC, instead.
Home equity lines of credit work in a similar way: You an borrow up
to the total value of your home's current equity. With a HELOC
though, you're setting up a revolving line of credit instead of
borrowing a fixed amount only. HELOCs work like credit cards and
other credit line accounts do: As you pay on the balance, more
funds become available for future use.
The home equity loan will usually have a fixed interest rate, so
locking in low rates can be less expensive for you over time. The
HELOC however, has a variable rate which changes over the life of
the loan, and can cause your payment amounts to fluctuate as well.
When going with a home equity line of credit instead of a loan,
some lenders might require you to withdraw a minimum amount of
funds when you first set it up, and they may have minimum
requirements for each time you access the loan as well. In most
cases you'll use the funds from the HELOC in the form of checks,
credit cards or electronic transfers.
With either a home equity loan or home equity line of credit, you'll be
required to pay off the balance when you sell your home. So this
additional expense needs to be factored into your selling price.
If you want a low interest loan that you can use for any purpose,
Citibank offers home equity loans and lines of credit with some of
the lowest rates in the mortgage industry. They were one of the first
banks to offer 30 year fixed rate home equity loans, and they do not
charge the borrower points, closing costs, or application fees.
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