Uderstanding Home Equity Loans

Written by Steve R. Lowry    Thursday, 22 January 2009

Are debts smothering you? Is the fear of paying for your child's college education keeping you up nights? If so, you may want to look above. That roof over your head may be the answer to your prayers. The amount of equity in your home equals the market value of the house minus whatever you owe on the mortgage. Let's say you could sell your house for $80,000 and you still owe $30,000; your equity is $50,000. That $50,000 can be used as collateral for an equity loan. However, most lenders won't let you borrow the entire amount of equity; the cap is usually 80%. What's the difference between home equity loans and second mortgages? Cheryl Broussard of Broussard/Douglas has the answer. "With a second mortgage, you receive a lump-sum loan. But you have to repay the principal and interest in equal monthly installments over a set time period, similar to car loans. "On the other hand, most home equity loans are essentially a revolving, second mortgage: You apply for a line of credit much like that of a credit card." You simply write a check when you need to borrow money and pay interest and principal only on that amount. A cautionary note, however: Never borrow money without knowing the interest rate. While interest rates on home equity loans are as low as 8%, most have variable rates with no limit on how high the rate can go. Watch out for advertised low initial rates that quickly vanish. "Lenders don't have to factor in points when they calculate the annual percentage rate, so initial rates appear lower," adds Broussard. Moreover, you may have to pay closing costs in proportion to the amount you borrow. Of course the biggest caveat: You run the risk of losing your house if you don't keep up your payments.

Last Updated ( Thursday, 22 January 2009 )