Home equity loans are based on the equity, or market value, of your home. Most lenders will allow you to up to 80% of your home's value, minus whatever you own on your primary mortgage. Some lenders will lend up to 90%, but you will pay a higher interest rate, and possibly interest points, which are paid upfront from your loan amount.
Home equity loans are superior to conventional personal loans in many ways because:
It is often easier to get approved for a home equity loan because it is secured by your property.
Repayment terms are usually more generous than those of traditional loans.
Your interest may be tax deductible.
Home equity loans, like any loans, should be sought for appropriate reasons. The recent housing bubble caused problems for those who thought housing prices would always rise, and that they could use their home as a personal piggy bank. These loans are secured by your home, and if you are in default, you may lose your home to repay them.
That being said, home equity loans are a great deal for purposes that will enhance your financial worth or quality of life. These purposes include:
Renovating your home. Home renovations not only add to the beauty and comfort of your home, but also increase its value, offsetting the loss of equity from the loan. Weatherizing or installing passive energy such as solar or geothermal systems provide not only energy savings, but also possible savings in the form of tax credits.
Bill consolidation. Paying off high interest loans and credit cards with a low interest home equity loan is financially wise, but only if you have the discipline not to accrue more debt when they are paid. This should only be done to make monthly obligations more manageable.
Education. When student loans cannot cover the entire cost of education, parents can use home equity loans to manage the shortfall, so that their children will not be burdened with unmanageable debt. Adults may also choose to further their education in order to advance in their career or to switch careers altogether. The value of education can't be measured only in financial terms. It can completely transform your life.
While home equity loans should not be used for frivolous purposes, frivolity is in the eye of the beholder. If you have always dreamed of a home theater, complete with a few rows of theater seats and a popcorn machine, and you are generally responsible and financially sound, a home equity loan is a great way to achieve your dream. (For more information, contact MCS Bank)