| A loan based on the equity of your home is an idea | | | | Why a Loan is Obtained |
| that has had much more interest in recent years. In an | | | | A loan on the value of the equity, sometimes called a |
| economy that was increasing with housing market | | | | second mortgage, is usually taken out when the |
| values rising, the homeowner could assume that a | | | | homeowner needs significant cash with a relatively low |
| second mortgage would be easy to obtain. A home | | | | interest rate. A homeowner may discover that home |
| equity loan comparison between possible types of | | | | equity loans have lower interest rates than all but a |
| mortgages and rates in those days would have | | | | few credit cards and other installment debt. Cash from |
| produced a lengthy list. Today, market prices on | | | | a second mortgage may be used to zero out high |
| housing have reached a plateau, or are falling in some | | | | rate credit cards or other charge cards. |
| locations. Obtaining home equity loans at present may | | | | Sometimes money obtained from the loan is used to |
| be more difficult than they were previously. | | | | pay for schooling for the homeowner or family |
| Defining Equity | | | | member. If major medical expenses have |
| Home equity loans are funds loaned against the equity | | | | accumulated, a home value loan may be used to |
| of your home. In an ideal world, home equity comes | | | | eliminate these debts. Any large outlay of cash that is |
| from three sources. First, the underlying mortgage over | | | | not available through other means can be covered |
| time will be reduced because it is being paid off. At the | | | | through a loan against the equity of your home. |
| start of the mortgage period, most of the monthly | | | | Factors to Consider |
| payments are applied to interest and very little against | | | | Some of the components that enter into the picture |
| the principal. In a standard mortgage, the monthly | | | | during the application for a second mortgage are the |
| amount applied to the principal will increase more | | | | loan amount, the interest rate, the term of the loan and |
| rapidly as time goes by. | | | | creditworthiness of the borrower. The lender will |
| The second way that equity in a home grows is due | | | | undoubtedly call for an appraisal to determine if the |
| to an increase in the market valuation of the home. If | | | | increased market value provides equity that is more |
| the house is worth more and the amount owed | | | | than the value of the second mortgage principal |
| remains the same, it is an automatic increase in the | | | | amount. |
| home's value. If the house was sold at the higher | | | | On the borrower's side, a home equity loan |
| market price and the proceeds applied against the | | | | comparison means looking at the entire personal |
| mortgage, the homeowner would receive more cash | | | | financial picture, both in the present and in future |
| because of the increased equity. | | | | projections. The homeowner must consider the ability |
| Finally, the home's equity can be increased by making | | | | to repay, whether or not the costs and fees applied to |
| improvements to the property. Improvements are | | | | the loan will outweigh the immediate benefits, and the |
| expected to increase the potential market price of the | | | | terms of the loan itself. As with any legal document, |
| home by more than the expense of the | | | | make certain you understand the true cost of the loan |
| improvements. Home improvement projects are one | | | | and all the terms that go along with it. |
| of the major reasons for obtaining equity loans. | | | | |