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Home Equity Lines Definition:
A home equity loan is a loan that
uses your home as collateral. Your home equity is the
part of your home that you actually own and this is
the guarantee for your loan. Home equity is calculated
by taking the current value of your home and subtracting
your mortgage. For example, if your home is worth $150,
000 and you have a $100,000 mortgage, you have $50,000
of equity in your home. A home equity loan allows you
to borrow money using your equity of $50,000 as security
for the loan.
A home equity loan, often called a second mortgage,
reduces your equity or ownership in your home. Since
your home guarantees your loan, if you default on the
payments, you can lose your home. There are two basic
types of home equity loans: the standard home equity
loan and a home equity line of credit. Another way of
borrowing against home equity is cash-out refinancing.
The Standard Home Equity Loan
A standard home
equity loan, (also called a term loan, a closed-end
loan or a second mortgage installment loan), works like
a traditional loan. You receive a lump sum payment at
a fixed interest rate and you pay the money back in
monthly payments over the life of the loan. Since the
interest rate on the loan is fixed, your monthly payments
will also be fixed. An example of this is a home equity
loan for $30,000 with an interest rate of 7.5% where
you pay the money back in monthly payments of $356.11
over the 10 year life of the loan.
Home Equity Line of Credit
A home equity line
of credit works like any other line of credit. You are
granted an amount you can borrow and you draw money
from the account as you need it. You pay interest on
only the amount actually borrowed and the interest rate
is variable over the life of the loan. While most home
equity lines of credit have a variable interest rate,
a fixed interest rate can sometimes be negotiated. A
home equity line of credit is 'revolving' meaning that
you can borrow money, pay off the borrowed money and
then re-borrow that money. The money in a home equity
line of credit is accessed using specially issued checks
or credit cards Here is an example of a home equity
line of credit: You are given a $20,000 home equity
line of credit. You borrow $10,000 dollars and are charged
a 5% interest rate. The interest rate for the home equity
line of credit is not fixed but varies with changes
in interest rates. If you pay back $5,000 towards the
principal, you still have $15,000 in your line of credit
that you can borrow against as needed.
Home Equity Line Cash-out Refinancing
While cash out refinancing
is not a type of home equity loan, it does allow you
to borrow against the equity in your home. In cash out
refinancing you take out a new mortgage that is greater
than what you owe on your current mortgage - you pay
off your current mortgage and use the difference as
a home equity loan. Here is an example of cash out refinancing.
Your home is valued at $150,000. Your mortgage is $100,000
and you have $50,000 worth of equity in your home. When
you bought your home, you got the going mortgage rate
which was 9%. Interest rates have since come down and
you decide to take advantage of the lower rates and
also borrow $20,000 from your equity for a home improvement
project. You take out a new loan for the $120,000 at
6% - you use $100, 000 of that to pay your old mortgage
and $20,000 for your home improvement project. You now
have a $120,000 mortgage at 6% where as you previously
had a $100,000 mortgage at 9%. The difference of $20,000
is the way in which cash out refinancing replaces a
home equity loan. Cash out refinancing typically has
a lower interest rate than a home equity loan but closing
costs associated with cash out refinancing are higher
than closing costs associated with a home equity loan.
If you would like to apply for
a home equity lines through the Coastal Coastal La Jolla Funding, click on this home equity
lines application.
For a print version of this page,
click on home_equity_lines_print.
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