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 A Home Equity Loan – Is It For You? Submitted By: Felicity Walker Home equity loans are often touted as being the solution to so many things – giving you access to money for home repairs or improvements, a way to consolidate debt, finance a sudden family emergency, or even as a way to start an investment portfolio. There’s a lot to think about, though, before you go and sign up for the first home equity loan you see.A home equity loan is like a second mortgage on your home. If your home is currently worth $130,000, and you have a mortgage against it for $70,000, then you have $60,000 of equity available. Some home equity loans may allow you to borrow up to 80% of your home’s value, others may go higher in special circumstances. In this example, you would be able to borrow another $34,000 as a home equity loan and still have only borrowed 80%.So the first step is to get a reasonably good idea of what your home is worth on the market. Your friendly realtor may help with this, but be aware that sometimes they can inflate the value in the hope of getting your business. You can also look at what price similar houses close by have sold for. Or you can pay a qualified valuer to assess your home. Now you have a starting figure, you can work out how much equity you have in your home. The other important figure to work out is how much you need for whatever purpose you have in mind. Hopefully that works out to be less than the equity available! It’s even better if it’s less than 80% of the available equity. At this point it’s important not to get carried away. It can be all too easy to say, well, I have $50,000 available and I really only need $30,000 to complete the repairs, so why not borrow $40,000 and blow the rest on a holiday? Remember – the more you borrow, the more it will cost you in repayments. It’s very easy to borrow too much, only to find yourself struggling to meet the payments maybe even losing your home.You also need to decide what type of home equity loan you want. There are two main types – a closed end loan and a line of credit. A closed end loan is basically the same as a standard home mortgage – you borrow the amount for a set period of time, and make payments over time to gradually pay off the balance.A line of credit, on the other hand, is like having a credit card with a big limit. Click here for the rest. |
 
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