A home is one of you most prized possessions. Buying a home could be one of the most important decisions of your life. Availing a home equity loan at the prevailing low interest rates can be really tempting! The added lure of tax deductibility coupled with the growing equity that a homeowner gains over a period of time also cannot be ignored. Find out more about home equity loans and home equity lines of credit. Be armed with enough information so that you can secure the best home equity loan rate.
Home Equity Loan Rate
With a home equity loan or line of credit, it is possible to borrow up to 80% of the equity in your house. If the house is valued at $100, 000 and your mortgage balance is %50,000 then you could borrow up to $100, 000. The house becomes a collateral for any loan on home equity. Careful analysis must be done before availing a home equity loan to ensure that its payment schedule fits into your budget.
The underlying danger in taking advantage of home equity loans is that you lose the house in case you are unable to make payments. A foreclosure will then be initiated by the lender and the proceeds of the sale will be used to reimburse the loan amount. When you owe more than what your home is worth, and then you will incur losses. This can easily happen in times of a downswing in the real estate market.
A home equity loan is typically used for home improvements that will improve the condition and value of the home. Renovations, upgraded kitchens and refurbished bathrooms and maybe a swimming pool increase the value of the home. A home equity loan is calculated on the basis of the current value of your home after taking into consideration the amount of mortgage taken. Sometimes a home equity loan is referred to as a second mortgage and it reduces your ownership in the house. You will trade your home ownership for the cash that will see you through an important need. Using the home equity loan for living expenses or depreciating assets like a car may not be prudent. The lender is comparatively at a lower risk since the house is a sure-fire collateral.
Benefits of home equity loan
- Taking advantage of low home equity loan rates seems tempting. Using the house as a collateral, you can avail of a home equity loan to take care of other pressing needs.
- Regardless of the manner in which a home equity loan is used, the interest paid on the first $100, 000 is tax deductible. This is where home equity loans score over credit cards and non-secured loans.
- If the home equity loan is used to purchase another home or improvements on the existing house, then the interest paid on the first $1 million is tax deductible. But it is advisable to consult a tax advisor on the benefits that you can enjoy.
- Home equity loans are used often as debt consolidation tools. Paying off high interest credit card loans is one such option. A single home equity loan payment is simpler than juggling many creditors with staggering payment schedules. Home equity loan Vs Home equity line of credit (HELOC)
You can get a lump sum when you avail a home equity loan. A home equity line of credit gives you a revolving credit line, very much the way a credit card offers. The standard home equity loan is also known as a closed-end loan or a term loan. This involves repayment by monthly installments over the life of the loan. In contrast, the HELOC grants an amount that you can borrow and draw from an account, depending on your need. Interest is paid on the amount that is borrowed. The home equity loan rate for HELOC varies over the life of the loan. Sometimes a fixed loan rate can also be negotiated. Since the home equity line of credit is 'revolving', you can borrow money and repay it and borrow it again.
Typically you can borrow up to 80% of your home equity. This loan-to-value (LTV) ratio is decided by dividing the total amount you have borrowed on your house divided by the value of the house. Some lenders extend loans even at higher LTV ratios but at higher loan rates because of increased risk. The term on the home equity loan is generally lesser than the average first mortgage on the house. It ranges from 3 to 15 years. Choosing a short term and still maintaining a comfortable payment schedule requires careful planning. Home equity loan rates are usually higher than mortgage rates. This increased rate on the home equity loan is to compensate the lender for the higher risk. After all, the first mortgage lender gets paid first, in the event of foreclosure.
The home equity line of credit carries an interest rate based on an underlying index plus a margin rate. If the current prime rate is 5% and the margin rate is 2%, the interest rate on the home equity line of credit works out to 7%. The draw period determines the life span of the HELOC. At the end of the draw period, you need to make a 'balloon' payment on the HELOC.
Home Equity Loan Rate
A careful study of the home equity loan rate is essential before you make a final decision. You can try and negotiate the best possible rate on your home equity loan through negotiation. Different lender may offer different prices. You can ask for a waiver or reduction on some of the fees or reduction in points. Comparison-shopping can get you the best deal. If the home equity loan rates have slid significantly, refinancing may be the best recourse. In this way, you can reduce your monthly payments and switch to a variable interest rate.
Applying for a home equity loan is simple. Credit and property checks are routinely carried out as standard procedures. Quick home equity loans are short-term personal loans that are granted before the standard procedures are complied with. When the loan is finally given, this short-term loan is closed, albeit with higher interest rates and increased fees. But the money is available to you a couple of weeks earlier.