Home-Equity Loan A home-equity loan, also known as a second mortgage, lets homeowners borrow money by leveraging the equity in their homes. Home-equity loans exploded in popularity in 1996 as they provided a way for consumers to somewhat circumvent that year’s tax changes, which eliminated deductions for the interest on most consumer purchases. With a home-equity loan, homeowners can borrow up to $100,000 and still deduct all of the interest when they file their tax returns.
Two Types of Home-Equity Loans
Fixed-Rate Loans Fixed-rate loan provide a single, lump-sum payment to the borrower, which is repaid over a set period of time at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan.
Home-Equity Line of Credit A home-equity line of credit (HELOC) is a variable-rate loan that works much like a credit card and, in fact, sometimes comes with one. Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or special checks. Monthly payments vary based on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the HELOC has a set term. When the end of the term is reached, the outstanding loan amount must be repaid in full.
Benefits for Consumers Home-equity loans provide an easy source of cash. The interest rate on a home-equity loan – although higher than that of a first mortgage – is much lower than on credit cards and other consumer loans. As such, the number-one reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances (according to bankrate.com). Interest paid on a home-equity loan is also tax deductible, as we noted earlier. So, by consolidating debt with the home-equity loan, consumers get a single payment, a lower interest rate and tax benefits.
Mortgage Refinancing At various times we could all use some extra cash, but it is not always easy to come up with it. That tropical vacation, home renovation or business opportunity might be just out of reach, but do not let those dreams fall by the way side. One solution might be to refinance your mortgage. This will give you that extra cash without a large repayment plan that can come with personal loans or lines of credit. There are other benefits to refinancing. You can take this opportunity to consolidate any high interest loans or credit cards. Another benefit of refinancing your mortgage is that you may be able to get a far better interest rate than your current one.
Debt Consolidation Debt consolidation is replacing several debts with one. You borrow enough money in one loan to pay off many other debts.For example, if you have unpaid balances on four credit cards, you might get a debt consolidation loan to pay off all four. You would then have a single payment to make each month.
Remortgage Borrowers consider remortgaging for various reasons. Often, the purpose involves saving money. Securing a new mortgage, at a lower interest rate than is afforded by the existing loan, may reduce the borrower’s monthly repayments. Obtaining a lower rate may also reduce the total amount of money the borrower must repay over the full life of the loan. Remortgaging can also serve to release equity in the borrower’s home. In real estate terms, equity is the difference between the market value of a home and the amount the borrower still owes on it. When an individual’s property increases in value, equity is built. Likewise, equity is increased as the borrower repays the mortgage loan. For example, if a borrower’s home is worth $150,000 and he or she has repaid $30,000, the borrower has $30,000 in equity. A borrower can obtain this equity money by remortgaging and borrowing an amount that exceeds the current mortgage debt. Obtaining a remortgage is fairly simple. Generally, the process is straightforward and similar to obtaining any other mortgage loan. The new lender reviews the borrower’s application and asks for certain related paperwork. Remortgage paperwork typically includes proof of income, debts, and expenditures. A home valuation is usually required as well. In some cases, the valuation may be less intensive than the type required for an initial loan and the surveyor may simply view the outside of the borrower’s home and ask a few pertinent questions. In other cases, a full valuation is required. There are certain fees involved in a remortgage. Often, borrowers are required to pay valuation and legal fees. Many lenders charge loan-processing fees as well. The amounts charged for a remortgage vary from lender to lender.
