The last ten years have seen an unprecedented increase in home values. In many areas of the country, housing prices have more than doubled in that short period of time. As a result, many homeowners have built a significant amount of equity in their homes.
What is equity? Equity is the difference between what your home is worth and what you currently owe the bank for your home. For example, a home worth $300,000 with an outstanding loan balance of $200,000 has $100,000 in equity.
Banks offer homeowners a way to access the equity in their homes in the form of home equity loans. With a home equity loan, homeowner can borrow against the equity in their home to take out cash for any reason. Many homeowners choose to use home equity loans to pay for college, a new car or home improvements and remodeling.
So how do you take out a home equity loan? There are three common ways in which you can get one.
- Through the internet - This is the newest way to get a loan. Major banks allow you to now apply online for a loan, including home equity lines. They will take the basic application information online and order an appraisal of your home. Then you will either be mailed the final paperwork or be asked to go into a local branch to complete the transaction.
In Person - The most common way to get a home equity loan is to visit your local bank or savings institution to speak with a loan specialist. The specialist will walk you through some simple paperwork, order an appraisal of your home and then process your home equity loan.
Over the phone - Most banks will also take a home equity loan application over the phone. Call your bank of choice and let them know you are looking for a home equity loan. They will then follow the same steps as if you had visited in person.
Due to the nature of a home equity loan, the paperwork process is considerably less involved than that of a mortgage loan. Most banks will simply run a credit check and order an appraisal to determine the value of your home. The typical home equity loan can only be made up to 80 or 90% of the value of the home, thus leaving you with a minimum of 10% equity in your home.
There are definitely some elements to seriously consider and scrutinize before taking out a home equity loan. This kind of loan must be approached soberly and with an examination and clear understanding of the terms and expectations.
- The loan rates are typically variable. If you borrow money at 6%, the payments will be considerably less than if the rates creep up to 7% or 9%. Rates can be unpredictable and very volatile over time. Historically, interest rates on home loans range from 5% to 19%. While you may be able to afford a 5% payment, should rates rise to historically high levels, you may find your monthly payment increasing four-fold. Are you prepared to handle it?
- Understand all terms of your loan rate. Some home equity loans will feature caps on rates while others may not. Some loans are written with a period of time in which the rate is fixed and then variable.
- Understand the repayment terms. Like any loan, the bank will eventually want their money back. Make sure that the repayment terms are agreeable. Some home equity lines are written with a balloon payment due after a predetermined period of time. What this means is that you may have a large sum due on a particular date, rather than continued monthly payments. Since your house is at stake, you must be familiar with the terms and prepared to abide by them.
- The loan is secured by your home. Unlike a credit card, if you default on a home equity loan, the bank can take your home. The debt cannot be erased by declaring bankruptcy.
The bottom line with any loan is that you should make sure that the loan is what you are looking for before you sign the final papers. Home equity loans carry the potential for considerable benefits and also drawbacks, so be sure that the terms are agreeable and understandable to you.