Home Equity Loans – A Fixed Rate Second Mortgage

Home equities are kept as collateral against home equity loan mortgages. They are second mortgages taken after a lien has already been taken against the first mortgage on the property. Let’s assume you have a first mortgage worth $100,000 on your home, for instance. For the last 5 years, you’ve spent $50,000 towards paying it off. Within the same amount of time, your home has appreciated to be worth $200,000. Therefore, your home equity is the sum of $200,000 – $50,000, or $150,000. A home equity loan in this case would occur if you took out a home loan worth $150,000, while the home equity was kept as security for the debt. Features of Home Equity Loans:

* The amount of money home equity loans provide is given in a single payment. * These loans are typically paid off over an extended period of time such as 15 to 20 years and, they have fixed interest rates. Primary mortgages usually taken longer to pay off than home equity loans. * Although the interest rates are lower than those offered by automobile and credit card loan companies, they are higher than those associated with primary mortgages. * You can save money on taxes by getting a home equity loan since the interest paid on it is tax-deductible. You can deduct $100,000 of interest from your taxes if you have $100,000 of home equity debt.

Advantages:

* You can use your home equity loan towards purchasing a second home or using it to do renovation. * Medical treatment and education costs can also be covered by the loan amount. You can also pay off a car loan or credit card debt with your home equity loan. You can also avoid paying high rates of interest on other debts by consolidating them into one loan.

Drawbacks:

* You can pay off outstanding credit card debt with your home equity loan. Be sure not to take advantage of this fact by charging even more to your credit card; you’ll end up significantly reducing your equity and increasing your unsecured debt. * You can eliminate unsecured debt such as credit card debt by filing chapter 7 bankruptcy. The individual will have to pay what they owe on their credit card if they take a home equity loan to consolidate it, however. The reason is because they have used the property as collateral against what they owe on their credit card. If not, they might face foreclosure and property loss because of failure to pay back the unsecured loan.

Related Posts:

• Home Equity Line of Credit