Home Equity Loan - ML Station
A home equity
loan, or second mortgage, allows the option of using the home as collateral
to borrow money. Equity is the part of your home that you actually own and can
be calculated by subtracting the mortgage from the current value of your home.
In a home equity loan, money can be borrowed using the equity on the home as
security for the loan. This can be risky, however, because neglect to pay on the
loan can result in losing your home.
There are several uses for home equity loans, many of which improve financial
status.
Debt Consolidation:
The home equity loan can be used to replace high-interest rate debt (including
credit cards). The payments on the home equity loan have much lower interest
than the credit card rates and they are tax deductible.
Education:
Home equity loans can be used to pay for your education or the education of your
child. Often times, these loans will allow the borrower to pay only the interest
of the loan during the time that the child is in college and begin payment on
the rest of the loan upon graduation.
Home Improvements:
Home equity loans can be used to make improvements, upgrades or repairs to the
home. In many cases these improvements can increase the value of the home,
resulting in higher equity.
Business Investments:
Home equity loans can be used to start a business or for investments, such as
property or the stock market. While this use of the loan may be very profitable,
it is also very risky, and some lendors will not give the loan if they feel that
there is too great of risk involved.
Other uses of the loan, which are unadvised, include paying for living expenses
and major purchases.
The two types of home equity loans are the standard home equity loan and the
home equity line of credit. The standard home equity loan provides the borrower
with a lump sum of money and requires the borrower to make fixed monthly
payments with a fixed interest rate. This loan may also be referred to as a term
loan, second-mortgage installment loan, or a closed-end loan.
The home equity line of credit grants the borrower a specified amount of money
and the borrower uses the money as needed via special checks or credit cards.
The interest rate is variable and interest is paid only on the amount actually
used. Another advantage to this type of home equity loan is that it is
revolving, which means that the money can be borrowed again after it is paid
off.
In most cases, lenders of home equity loans will lend until the LTV
(loan-to-vaule) ratio is at 80%. The LTV ratio can be calculated by dividing the
total money borrowed by the value of your home. Some lenders will lend more, but
with greater cost due to the higher risk.
While home equity loans may be very beneficial in improvement of financial
status due to their low interest rates and tax deductions, the risk of putting
the home on the line must be given great consideration.
To get VA Loan information, you may visit the Home Loans. They provide other great resources.
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