If you are like most people, then your home is your largest investment and you make your monthly mortgage payments in hopes that each month you own just a bit more of your home. This ownership is called equity and it builds as the months go by and can be accessed by you when you need it in the form of a home equity loan.
A home equity loan is really like a second mortgage and not exactly like a home equity line of credit. Whereas a home equity line of credit works basically like a credit card with your home equity as security, a home equity loan is a fixed loan amount with fixed monthly payments.
What is a Home Equity Loan
A home equity loan is quite simply a loan given to you by a lender that is based upon the built up equity in your home. The security of the loan is this equity. As you pay down your home and the value of the property increases (hopefully), equity builds. For example, if your have paid down the principle balance of your home to $75,000 and the current appraisal value of the home is $125,000, then you have $50,000 of equity. This is your money and money that you can use to secure a home equity loan. Lending institutions will loan you money, generally at an affordable rate, on the basis of this equity.
Purposes of a Home Equity Loan
There are a wide variety of reasons for obtaining a home equity loan. Once you have the loan, you can use the funds for any reason you see fit, though some of the most common reasons include the following:
- Home improvements
- Pay off high interest credit cards
- Pay off other debts
- Send kids to college
The main thing to consider is that you are accessing this equity for a positive financial purpose. It is your money to do with as you wish, but responsible financial planning requires that you have specific reasons for what you are financing and a specific amount that you need. Just because you have $50,000 worth or equity, does not necessarily mean that you should get a home equity loan of $50,000.
Advantages of Home Equity Loans
Home equity loans have some distinct advantages over other types of credit. This is mainly due to the fact that the money is technically already yours and the loan is less risky for lenders.
The reason for choosing a home equity loan over other types of credit include any or all of the following:
- Cheaper:The interest rates are generally lower than other types of loans such as personal loans and credit cards.
- Ease of approval:If you have built up equity in your home, you will generally have an easy time getting approved even if your credit is not that good.
- Loan size:You can get a rather large home equity loan as long as the equity exists in your home, allowing you to get the proper amount of funds that you need.
- Tax deductible payments: You should check with the loan officer and your accountant to make sure, but payments on home equity loans may be tax deductible.
Protect Your Home Equity
Your home is your biggest investment and thus requires the most protection of all your assets. It is important to protect yourself against unforeseen incidents. Whether it be an accident that keeps you from working or the sudden loss of your job, the mortgage payments and the home equity loan will still need to be paid. The last thing you want is foreclosure on your home that you have worked so hard to obtain. This is the reason to consider mortgage insurance.
Mortgage insurance can be purchased rather cheaply and will pay all or a part of your mortgage and second mortgage under specific circumstances if you are no longer to pay the bills yourself. You can find mortgage protection insurance to insure you against any of the following:
- Loss of job
- Permanent Disability
There are many different mortgage insurance policies that you can purchase with a wide variety of options. If you are interested in mortgage protection insurance, then you should look into specific policies and providers to see if you can find a policy that fits your needs at a price you can afford.
Home Equity Loans and Smart Consumers
To get the best interest rate possible, shop around to different lenders. Not all are the same and the rates and fees will vary. Make sure your credit score is accurate so that you will be looking at the rates you deserve. Also, make sure the amount of the repayment is something you can afford. As a smart consumer, you should not forget to check out mortgage insurance. It can be helpful if something happens and can help to save your home for you and your family.
Similar to selecting homeowners insurance, a home equity loan can be a smart personal financial decision to help consolidate debts and pay for things that are necessary. However, acquiring the loan is a process that allows you to make decisions. If you make the right decisions, you can save money and protect your home.