Understanding Home Equity Loans

The term "equity" may send you looking for a dictionary to learn what it means. If you are like most people, then you have probably heard the term used frequently on television thanks to a very hot housing market over the past couple of years. The following will clarify the term for you, and if you are a home owner, may even teach you about a loan option available to you that you didn't even know existed.

What is Equity?

Equity is the amount of something less any debt. In the case of real estate, for example, the equity in your house is the value of your house minus what you have left to pay on your mortgage. If your home is worth $200,000 and you owe $50,000 on your mortgage, then your house's equity totals $150,000.

A home equity loan allows you to take out a loan based on the equity you've amassed in your property. Many people take advantage of this option in order to remodel their home, take a vacation, payoff credit card debt, or even purchase a new car.

If you own a home and are just learning about this option it probably seems very appealing. If you decide a home equity loan is for you then you will need to contact a lender who offers this type of loan. However, it is important that you make sure and shop around. Get a minimum of three quotes from different lenders in order to find the best deal. Shopping for a home equity loan is not much different than shopping for a car or expensive appliance. Financial institutions compete for business. Give yours to the one with the best offer.

The Benefit of Home Equity Loans

Many home equity loans are offered with low interest rates. This is because when you take out a home equity loan your home is used as collateral. The lender sees this as low risk because if you default on the loan, the lender can sell your house and recoup most, if not all, of the loan made to you.

Credit card debt is the biggest reason many people take out a home equity loan. Credit cards charge interest rates that can be as high as 21%, while home equity loans charge a rate that can be as low as 4%. For a family with several thousand of dollars in credit card debt this translates into high payments each month, especially if the debt is spread over more than one credit card. A home equity loan offers the opportunity to combine the debt and repay it using the proceeds of the loan, which in turn will save the borrower a significant amount of money in interest charges.

Yet others may take out a home equity loan to cover unforeseen circumstances that arise, such as job loss or illness. A home equity loan can help lessen the crunch of overwhelming medical bills, as well as allow you or a loved one to take the time off work necessary to recover without the worry of financial strain.

If you've worked hard to build equity in your home and you find yourself in a financial pinch, a home equity loan can be a great help. However, maybe you want to remodel your house and improve its value even more, or maybe you're looking to buy that new Mercedes without having that $800 per month car payment. Whatever your reason, if you are a homeowner with a significant amount of equity in your house, feel assured that the years of mortgage payments you have made have paid off.

 

About the Author:

Read more Finance related articles at: myfinance-magazine.com