All About Home Equity Loans – Some key things you need to know

Some Key Things You Need to Know About Home Equity Loans

1. Your home equity is the difference between your home's fair market value and the amount you currently owe on the mortgage. It's the amount of the home's value that you actually hold, and so does not include the bank's partial ownership of the value through your mortgage.

2. Lenders typically like for the sum of your mortgage balance and your home equity loan balance to be no more than 80 - 85% of your home's value. Therefore, you need to have more than 20% equity to be eligible for a home equity loan. This equity could be from your initial down payment, your monthly payments since buying your home, or an increase in your home's value.

3. There are actually two major types of home equity loans. A traditional home equity loan also called a second mortgage, is a lump sum loan that you get all at once and repay in equal payments over several years.  Just like a traditional, or first mortgage, this loan may have points, loan fees and other costs associated with it.  The good news is that there are many different lenders who will do second mortgages.  It pays to talk to different banks, credit unions and/or mortgage brokers.  Also, just like a first mortgage, if you fail to repay the loan, you can be subject to foreclosure.


4. A home equity line of credit (HELOC) is more like a credit card, and your payment is based on how much you're currently borrowing.  There are many different types of home equity lines of credit and it will make sense to check it out to determine what works best for your personal needs.  Unlike a home equity loan, the APR for a home equity line of credit does not take points and financing charges into consideration. There may be, however, specific fees and restrictions on how much of your equity you can take out.  Other factors to take into account are opening fees, variable or fixed interest rates, repayment terms and any other safeguards built into the loan.

5. You can use money from a home equity loan for any purpose, whether related to your home or not. Some of the most common purposes are making home improvements, consolidating other debt, purchasing a vehicle, paying for a vacation, or financing education.

6. For many people, the interest you pay on your home equity loan is tax deductible. If you deduct interest on your primary mortgage, you will probably be able to claim home equity interest as a tax deduction as well.  It is best to consult with your tax accountant for more specific information on any tax ramifications.

7. There is a three-day cancellation clause if you are using your primary residence for the equity loan.