Home Equity Loan

Most areas of the Unites States have experienced a booming real estate market that has left quite a few of us with homes values far greater than the price we paid for them - we've built up equity in our homes. It is also safe to say that for the vast majority of Americans, your home is usually the single largest asset you own.

Building Home Equity

If your home has grown in value over the years then you're probably eligible for a home equity loan. This type of loan is sometimes referred to as a second mortgage since the loan is secured by your house.

Additional Resources

A home equity loan is based on the principle that lenders allow you to borrow against the value of your home. The exact value that you can borrow against is what might be called net value or true equity. The overall concept goes something like this:

A home is a physical asset with real market value - it can be sold for money or cash.
Homeowners possess this asset, but may also share ownership with a bank or lender via a mortgage or loan agreement.
The equity the homeowner has in their home is the market price of that home minus the outstanding balance, or principal, on the home's mortgage.

Home equity usually increase over time in two ways - as the homeowner pays down the mortgage and the home's market value increases. Generally, lenders will allow homeowners to borrow up to 80% of the equity they have in their homes.

Popularity of Home Equity Loans

Rising home values coupled with interest rates near historical lows, has resulted in the growing popularity of home equity loans. Just like mortgages, these loans can have fixed or variable interest rates and terms that extend to 30 years. In case you're wondering how large of a loan you might qualify for, here is a simple example:

Home Equity Loan Example

Let's say that your home would sell for $300,000 in today's market - eventually the number would be validated by a professional appraiser. Most lending institutions would allow you to borrow up to 80% of the home's appraised value, but let's be conservative at 75%. So in this example, you could borrow $300,000 x 0.75 or $225,000.

But wait a minute, if you're like most Americans, you've got an existing mortgage on the home - let's say the remaining principal on that loan is $125,000. The maximum size of the home equity loan then would be calculated as $225,000 - $125,000 or $100,000.

Now the thought of a $100,000 loan might be tempting to many of us because we can pay for a lot of luxury items with that money. But we need to keep one thing in mind. If we borrow this money, then we must able pay it back. Remember, the loan is secured by our home, so default on the loan can mean declaring bankruptcy, and we lose the house via bank foreclosure.

Home Equity Loan Tips

Here are a couple of home equity loan rules that might help you steer clear of trouble:

Don't agree to any loan if you do not have the income necessary to pay back the loan. Reputable lending institutions and banks will help you figure out a comfortable loan amount.
Don't sign your Deed over to anyone without first consulting an attorney.
Don't give in to sales pressure. It's your home and you are responsible for paying back the loan. Decisions like this deserve time for thought.
Read all the terms and conditions before you sign something. If there is language that confuses you or you have questions, consult an attorney.

Home Equity Loan Rules

There are laws to protect you when entering into these types of agreements. The Truth in Lending Act requires lenders to disclose all the important terms and conditions, costs of the home equity loan, charges, payment terms and other features of the loan - including the Annual Percentage Rate (APR).

We've mentioned this in earlier articles, but the APR for a second mortgage loan takes into consideration not only the interest rate charged but also mortgage points and other items such as loan processing fees. So when comparing choices, the APR is the number to look at closely.

Home Equity Loan Calculations

If you're thinking about taking out a home equity loan, then one thing you can do before you contact a mortgage company, bank or lender is run though some borrowing scenarios yourself. And we've got an extensive line of online mortgage calculators that can help. This offering includes a blended rate mortgage calculator that can help you see the financial impact of owning two loans at the same time.

We've also got a mortgage comparison calculator that can help you evaluate different lender offerings on the marketplace. Finally, we've even got a maximum mortgage calculator if you're worried about whether or not your family or household income qualifies you for a larger loan.

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