Sometime in your life you may need some extra money. Some people get home equity loans. Equity is the difference between what you owe on your mortgage and the market value of your home. You build equity as that difference grows. As you repay the mortgage principal to decrease the amount you owe or when your home’s value increases, you build up equity. You can borrow against it by making a home equity loan or establishing a line of credit. Both have much lower interest rates than credit cards and personal loans. The interest you pay on a home equity loan or line of credit is usually tax-deductible.
A home equity loan provides you with a lump sum amount of cash. The terms are simple. You repay the loan over a specified time at a fixed interest rate. The payment rate is set at the time of the loan and it never changes. If the value of the loan is not greater than the value of the house, you may be able to deduct the interest on the loan.
A debt consolidation loan, another type of home equity loan, lets you combine all your debts into one loan. Having to make just one payment a month, you can better manage your debt. If you’re consolidating credit card bills, don’t use them after you get the loan. Cut them up and destroy them. Better still, contact the financial institutions that issued the cards and close the accounts. Otherwise, you might be tempted to overspend, which is what got you in trouble in the first place.
A home equity line of credit has some advantages over installment loans. There is a specified amount of money you can draw upon as you need it for up to 10 years. You only pay on the amount of credit that you use. Payments are based on the amount you borrow and the interest has a variable rate. As you repay the loan, you have more money you can borrow against. Interest rates for lines of credit and payment amounts are adjustable over time.
Today you can apply for a home equity loan or line of credit online. The minimum amount you can borrow is $5,000, although some online companies have set the minimum at $10,000. The amount of your loan is determined by the relationship of the amount of the loan to your home’s value. This is called the LTV (loan to value) ratio. Loans of $100-500,000 are not uncommon.
You can usually qualify for a loan or line of credit providing that you meet the following criteria. You have built a credit history involving credit cards, auto loans, or a mortgage. You usually pay your bills on time (some exceptions may apply). You have had no more than two or three late payments reported to a credit bureau within the last 7 years. There have been no bankruptcies or judgments against you with a discharge date of less than 5 years before you apply for the loan. You have not had bills reported to a collection agency within the last 10 years.
The online process is usually very simple and takes little time. You’ll be asked some basic questions about yourself, your income and the mortgage property. Next, a copy of your credit report is obtained electronically. You’ll be asked which of your loans are related to the property being mortgaged. There will also be an electronic appraisal of your home’s value. Once the online company reviews all your financial data, it’s just a matter of seconds or minutes until they approve or decline your loan.