Alternative To Home Equity Loan

By Sean A. Kelly

Home equity can be defined as the difference between the home’s fair market value and the outstanding balance of all liens on the property. To determine the same, you can subtract the balance amount of the mortgage from the current market value of the property. Alternatively it can be stated that the equity on the home/property increases as the balance amount of the mortgage decreases provided the market value of the home/property doesnt decrease at a faster rate. For example, if the house has been appraised for $300,000.00 and $125,000.00 is the amount outstanding on the mortgage, then the home equity would be $175,000.00. This can be assumed to be the generally accepted rule to calculate home equity provided there are no second mortgages or liens. In case of secondary mortgages and liens, calculations of the home equity would involve these liabilities too. The exact figure could be arrived at after deducting the relevant amounts against the amount arrived at in the first place.

The valuation of the home equity can enable home owners to avail loans against the equity without having to sell their primary property. Home equity loans were once known as second and third mortgages for the property. Though, it is no longer thought so.

Home equity loans can be availed for various reasons. The loans against home equity may be availed for paying childrens college tuition, improvements to home or purchase of new or additional property.

Availing home equity loan can be beneficial to both the lender and the homeowner. The owner may be able to raise money at a low rate of interest and the lender would have the house as collateral. Since a person would generally not want to lose the home, the lender would be assured that there would be no defaults and in case of defaults, the lender would have rights to the house and therefore can foreclose the loan. In case there has been a substantial amount of equity built on the home, the homeowner may like to use it for his/her needs.

Home equity loan line of credit may be often used interchangeably with home equity loan. This though being the case, home equity loan and home equity line of credit are actually very different from each other. Home equity line of credit, as the name suggests could be described as a type of credit facility available to a homeowner against the equity calculated. It would work similar to a credit card. This type of credit is revolving and the equity that exists in a home would be the collateral for the line of credit. The borrower or the homeowner can take as much or as little of the credit that would be required and pay back the amount of credit availed. This could be a continued process of availing credit and paying it back. As in the case of a credit card, the payments would include an interest component. Irrespective of this interest, there is benefit that a borrower can avail. The interest on the line of credit may be deductible from the tax payable.

It would be often advisable to avail a line of credit with regards to home equity rather than a home equity loan as the former is usually an open credit. Generally, lenders are restrictive when they issue a line of credit. A certain percentage of equity would have to be maintained and thus more often than not hundred percent of the equity may not be issued as a line of credit.

Home equity loan rate is the rate of interest at which loans are disbursed against home equity as collateral. The rates of interest offered by various banking and financial institutions are often favorable as real estate may be perceived as a stable investment. This may be so if there has been appreciation in the history of real estate. Home equity loans may be availed from banks and financial institutions other than the borrowers bank. It may be often beneficial to avail home equity loan from other institutions other than the private banker as the rates offered could be lower and the terms and conditions of the loan could be worked to the borrowers advantage. However it may be advisable to look into both options of availing loan or line of credit before deciding on using the home equity as collateral.

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