How To Understand the Home Equity Rate

In the United States, the current state of consumer debt is estimated to be at $2.56 trillion (according to the Federal Reserve Board), while average savings were pegged at -0.5% in 2008. Why are so many people in a state of debt? Two major factors could be presented here: one is the deep sense of consumerism in the American system, and another factor is how debt options, particularly home equity loans, were made highly available specially during the early 2000's.

Speaking of home equity loans, here's a brief backgrounder on this. How much your home equity is depends on how much you still need to pay on your home mortgage, subtracted from your home's fair market value. To illustrate: let's say your home's fair market value (or the estimated price of your home based on such factors as its size, location, current house values, etc.) is at $500,000. So far your mortgage balance (or the money you still have to pay) is at $200,000. That means, your home equity is at $300,000.

The value of your home equity is a factor in determining how much you qualify for a home equity loan. Through some financial institutions, you may be able to borrow almost the full amount of your home equity. Typically, figures are at 75% of the appraised value of your home minus the mortgage balance. If there are other outstanding debts (such as second mortgages), these values will be subtracted as well from your home equity loan. Your home will be the collateral to this loan (meaning, the lender will take possession of your property) in case you fail to fully pay the debt in the prearranged terms. That's why home equity loans are considered to be high-risk loans, especially when viewed in comparison with credit loans, which are mostly unsecured debts. Taking out home equity loans do have some benefits, as the home equity interests you pay may be tax-deductible.

How did home equity loans come to be? A brief history of home equity loans is closely attached to the rising trends in American debts and loans. Although it has been present since the 1920's (during the Great Depression era), it began to develop as a foremost borrowing tool during the late 1970s and early 1980s. It started off with the name, "second mortgage." Due to the negative connotation of this name, however, bankers thought up the name, "home equity loans," because of its connotation of fairness and ownership.

The real boom that home equity loans experienced happened in 1986, thanks to tax law changes which promoted the replacement of consumer loans with mortgage loans, home equity loans became popular as a refinancing tool. Another aid to the popularity of home equity loans is when Merill Lynch began campaigns that educated people about the concept of taking out a loan against your home. They also wanted to negate the idea that this borrowing method was "borrowing of the last resort." Instead, they promoted the idea that taking out home equity loans is a smart choice, or a way of making your mortgage work for you. This campaign became even more aggressive especially in the boom era of the early 2000s where people were confident that there would always be money around, and when ad campaigns, such as Citigroup's "Live Richly" campaign, became ubiquitous.

During these times, however, and as more and more properties are being foreclosed as families cannot keep up with their payments, people have become to realize home equity loans or home equity refinance options for what they are - high risk loans which should be attempted only as last resort. However, if you do need to take out a home equity loan, make sure that you do comparison shopping among the different rates and terms available. Read up on options such as different variable rates, some with the option to lock it all in. Look for the lowest mortgage rate and the best loan mortgage terms (remember to read the fine print). Take advantage of online home equity calculators to help you determine your payments, and whether it's truly worth the risk for you.


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