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Home Equity Loans

Also Home Equity Lines of Credit

Some Quick Acronyms For You:

HELs = Home Equity Loans

Home Equity Lines of Credit = HELOC

Home Equity Loans and Lines are commonly thought of as second mortgages. The stats say for the most part this is true with over two-thirds of borrowers explaning the need for extra cash. Many people are scared of taking on more debt, but I have to say once you have a home you must get a Home Equity Loan or open a home equity line of credit. If played properly, this can mean an even bigger tax deduction for things you would not normally be able to deduct from taxes and be paying a higher interest rate on anyway.

Home Equity Loans

HELs are just like your standard fixed mortgage. You are given a pay schedule and must pay it off within the time agreed upon. Usually they are shorter because there is less money involved than your standard mortgage. The common terms are 5, 10, and 15 years. You can also pay these loans off early without penalty, in most cases. This usually involves a fixed rate term.

Home Equity Lines of Credit

HELOC are a little different. The bank gives you a fixed number that you can borrow at anytime. Usually you need at least to borrow at least $15,000 - $20,000 to get started. Here is the beauty of the HELOC, you only pay interest on what you are borrowing at any one time.

Let's say for example you borrow $100,000 and the current rate is 7.00% . Monthly you would be paying $583.33. The same would apply to a standard home equity loan with the same terms. On a HEL they would tack on some Principal as well.

 

Now god forbid a rich uncle pass and leaves you $50,000. You now could pay down your line to owe only $50,000. The next month your monthly payment would only be $291.67.

I'm a real fan of Lines for this reason, it puts me in charge my money. If I knew I could easily handle the monthly payment on a HEL, I would always opt for the HELOC instead.

HELOCs usually come with an annual fee around $200 to keep them open, if you pay off your balance. To keep them open. I use lines to payoff any thing I would normally take a loan out for Home Improvement, Autos, even college. I always know the money is there when I need it.

A. How does it work?

Normally, the bank assesses your property and determines how much equity you actually have in the property. They subtract the amount you owe on the home from value of the property. This is the beauty of it. You may think you only have 15% equity because you put 15% down when you purchased the home. But, the assessor can come back with a big number for you and most people I talk to it that situation have 30-40% equity.

Once they determine how much equity you have, banks will normally allow you to borrow up to 80% of that equity. For example, your house assesses for $300,000. You owe the bank $200,000 on your first mortgage. So the home equity bank sees that own $100,000 of the home. They would allow you to borrow up to $80,000 for a line or standard home equity loan.

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