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November 2013

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Home Equity Loan Basics
Important tips to keep in mind when considering a home equity loan

When it comes to finding the funds to cover those big expenses, whether it be paying for college, covering home improvements, taking that dream vacation or something else, the equity in your own home can be a great resource. Understanding the basics of home equity loans, however, can seem overwhelming. Here are some of the basics to help you better understand and utilize the equity in your home.
Home equity loans are best defined as a loan that you can take out against the value of your home; when you take out a home equity loan, the funds are paid out as one lump sum.
 “A home equity loan is a second type of mortgage… These loans are often attractive because you can borrow relatively large amounts of money, and they’re easier to qualify for other loans because they are secured by your house,” according to Justin Pritchard, a financial specialist,
It’s important to keep in mind, however, that once you take out a home equity loan, you can’t take another one out in the future, even if you’ve repaid your loan in full. Here are some additional basics to keep in mind while you consider a home equity loan for your financial needs: 
  • Interest rates - Any home equity loan will include a fixed interest rate, meaning your monthly payments will remain the same, offering an easier way to budget around your payments. Your interest paid on your loan may be even tax deductible.
  • How to qualify - You have to have available equity in your home to take out a home equity loan; many lenders can allow borrowers to borrow between 80 and 85 percent of their home’s value, minus what they still owe. Other factors that may play a role in your qualifying for a loan include your credit score, your credit history, your monthly income, any current debt that you carry, etc – much of the same factors that played a role in qualifying for your mortgage. 
  • Maximum amount - The maximum amount that you’re able to borrow will be calculated by your financial institution. 
Home equity loans carry both benefits and disadvantages. Some of the benefits include lower interest rates, tax-deductible interest and larger loan amounts. However, home equity loans can also pose disadvantages for uninformed borrowers; these loans are secured with your house being the collateral. If you fail to repay the loan, your financial institution can take your property. It can also be tempting to use your home’s equity for frivolous expenses.
“Be sure to use your home equity only for the most important expenses,” Pritchard notes. “Things that will improve the value of your home or improve your income are good examples.”
When it comes to applying for a home equity loan, don’t assume that if one financial institution turns you down that you should give up. Try several different institutions.
“Many [financial institutions] also have cash and want to lend,” according to Donna Fulscado of “When looking for a home equity loan, be mindful of high-cost lenders or what the Federal Deposit Insurance Corp. calls "predatory lenders." If the offer is unsolicited or seems too good to be true, chances are it's not true.”


Published by Avidia Bank
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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.

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