Understanding Loan Terms

Three Questions About Home Equity Loans

26 March 2021

Stanley Simmons

Did an unexpected expense come up that you do not have the money for? If the financing options you have been looking at include high-interest rates or short terms, you may be looking at an alternative. Consider using a home equity loan to get the cash that you need for the following reasons.

What Is A Home Equity Loan?

One of the benefits of using a home equity loan is that it allows you to borrow the equity that you've built up in your home, which is the money each month that has gone towards paying down the principal balance. Home equity loans can be used to pay for practically any type of expense that you have since it is money that is secured by borrowing it from your home. The interest that you pay on a home equity loan is even tax-deductible in most situations, which is an added bonus

How Much Can You Borrow?

The formula for figuring out how much you can borrow with a home equity loan is pretty straight forward. You would take the value that your home is worth, which would usually be the purchase price of the home when you first bought it. However, if your home has gone up in value, an appraisal could be performed to tell you the home's current value. You then subtract the amount of money that is left to pay off the principal balance, which will tell you how much equity you have in the home.

Some lenders will place a restriction on how much of your home's equity you can borrow. They may let you borrow 100% of your equity, or cap it at something like 85%. It all depends on your lender and what they are comfortable with offering you.

How Do You Pay Back The Home Equity Loan?

Be aware that your home equity loan is not bundled together with your mortgage if you are still paying off your home. It will be paid back in the form of a second mortgage. This is actually a good thing because it can give you some flexibility to decide which mortgage you want to pay off first if you have the cash to make additional payments down the road. Ideally, you'll want to make additional payments towards the mortgage that has the highest interest rate so that you can get rid of it first.

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About Me

When was the last time you realized you were in the red financially? Although most people don't think about their finances on a day to day basis, it can be easy to find yourself living paycheck to paycheck if you aren't careful. I began thinking carefully about the financial implications of some life decisions I was making, and I knew I had to make a difference. I talked with a loan officer about getting things together, and he was instrumental in helping me to work things out. Read more about my financial successes and failures on this little website. You might be able to avoid some of my previous mistakes.