Home Equity Loans

Learn valuable facts and information on home equity loans to determine if a home equity line of credit is right for you.

Equity is the amount of money you would gain over and above what you owe on your mortgage if your home were sold on today's market. A loan secured by this equity can enable you to tap into money for things such as home improvements, trips, bill consolidation, college tuition, or any other necessary expenses. Even if you have only lived in your home for a short time, you may have enough equity to qualify for this type of loan.

A home equity loan is typically a revolving line of credit. You are given a credit limit, and you have the freedom to use it for whatever purpose you desire. This is a continual source of credit that is secured by your home. What this means is, your home is literally on the line. This type of loan is not for everyone. If you do not make the monthly payments required, you could lose your home. If there is a chance you will lose your source of income and not be able to pay back the loan, you could very well get into trouble. Carefully consider this before signing on the dotted line. There are other types of loans that are less risky.

Depending on your credit rating, some lenders will allow you to borrow as much as 85% of the appraised assessment of your home with the exception of the amount you owe on the mortgage. The interest rates are typically lower than interest rates offered with other types of loans or those imposed by credit card companies.

One major benefit to a home equity loan is the fact that you can claim the interest you've paid at tax time. This isn't an option with credit cards or personal loans, so if you could benefit from this type of tax deduction, a home equity loan may be right for you.

If you find you can only pay the minimum amount due on your home equity loan, you will be fighting a losing battle. Paying only the minimum amount required will hardly make a dent in the balance. Go over your budget and finances very carefully before choosing a home equity loan. The bank may be willing to give you the loan, even if you technically cannot afford it. If you have built up a large amount of equity in your home, the bank has more to gain if the home goes into foreclosure.

When you apply for a home equity loan, the potential lender will ask you to fill out an application. You will typically be asked your employment status, income, obligations, assets, and questions about the real estate you wish to use as collateral for the loan. You will also usually be asked if you have filed bankruptcy in the past 10 years, if you have any pending judgments or suits against you, and if you are a guarantor or co-maker of any debts, contracts, or leases. All of these issues will be taken into consideration to determine if you qualify for a home equity loan.

When searching for a financial institution to do business with, look for one you know and trust. Research them carefully to avoid those with unscrupulous business practices. Some will impose ongoing fees and try to hide extra charges and conditions of the loan. Before signing any papers regarding your home equity loan, make sure you understand them. Have the loan officer explain anything questionable.

Some lenders may try to include credit insurance you did not request. There is an extra charge for credit insurance. If having this insurance is not required in order to secure your loan, you have the right to refuse it. Take into consideration if you can afford the additional charge. This is a nice protection to have, but you may find it isn't feasible.

If you find yourself a victim of fraud regarding a home equity line of credit, write a letter explaining in detail the problems you have encountered to: Correspondence Branch, Federal Trade Commission, Washington, D.C. 20580. If they discover the lender is performing illegal transactions, they will take action against them. Keep in mind, the best protection is knowledge. Don't sign anything without fully understanding what you are agreeing to. If necessary, take the contract to a lawyer who will go over the papers before you sign them.

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