When you've been paying on your home for any length of time, you've
started building up equity. In its most basic sense, equity is the amount
of the total home value you've already paid off. So if you have a mortgage
on a home worth $100,000, and you've been paying your mortgage long
enough to have $10,000 of the principal balance paid, you have $10,000
worth of equity. Technically you own 10% of the home at this point, and
your bank or mortgage lender still owns 90%.
That equity is an asset you can use though, to get actual cash for other
expenses. Doing this normally involves getting a home equity loan, and
these loans can be used to pay off other outstanding debts you might
have such as vehicle loans or credit cards. You can also use home
equity loans to pay for improvements or additions to your home, and you
can even use the loan funds to pay for your children's college expenses
or take a vacation.
A home equity loan is just that: A straight loan in an amount that meets
certain criteria. Your home equity lender might only allow you to borrow
up to 85% of the home's value for instance, minus the outstanding
amount still owed. So with the $100,000 home example above, if you
owned the home in full you'd probably be able to borrow up to $85,000
with a home equity loan. Since you still owe $90,000 to the bank though,
you'd only qualify for 85% of the $10,000 equity you've built up, or $8500.
This isn't set in stone either. How much you're able to borrow with a
home equity loan will depend on your credit rating, the length of your
home equity loan, and the lender you choose to get the loan through.
Since a home equity loan is a loan, you will have interest rates and a
monthly payment to deal with. You need to make sure you do the math
before taking out a home equity loan, and make sure you'll be able to
meet your increased monthly obligations this loan will generate.
Many people take out a home equity loan to deal with money and debt
problems. They find themselves with massive credit card debt, large
monthly vehicle payments, and other debts that make it extremely
difficult for them to cover all the bills each month. By taking out a home
equity loan, they're able to pay off some or all of that debt using funds
from that loan.
This can be a great way to relieve your monthly cash flow burdens, but
again you must do some serious math before going forward: Will the
monthly payment for the home equity loan be lower than the debt
payments? And will the amount of your home equity loan actually pay off
some or all of those other outstanding debts?
You also need to be diligent in shopping around for home equity loans.
There are unfortunately some predatory lenders that make offers which
seem almost too good to be true. And often they are. Be sure to talk to
multiple lenders of different types before signing on the dotted line. Your
local banks and credit unions should be one place you look to for home
equity loans, and don't overlook national lenders available on the
internet either. Always be sure you know the exact terms of your home
equity loan, read all the fine print, and compare as many different
lenders as you can.
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