Home Equity Loan Comparison - Finding the Best Loan For Your Money

A loan based on the equity of your home is an idea that has had much more interest in recent years. In an economy that was increasing with housing market values rising, the homeowner could assume that a second mortgage would be easy to obtain. A home equity loan comparison between possible types of mortgages and rates in those days would have produced a lengthy list. Today, market prices on housing have reached a plateau, or are falling in some locations. Obtaining home equity loans at present may be more difficult than they were previously.

Defining Equity

Home equity loans are funds loaned against the equity of your home. In an ideal world, home equity comes from three sources. First, the underlying mortgage over time will be reduced because it is being paid off. At the start of the mortgage period, most of the monthly payments are applied to interest and very little against the principal. In a standard mortgage, the monthly amount applied to the principal will increase more rapidly as time goes by.

The second way that equity in a home grows is due to an increase in the market valuation of the home. If the house is worth more and the amount owed remains the same, it is an automatic increase in the home's value. If the house was sold at the higher market price and the proceeds applied against the mortgage, the homeowner would receive more cash because of the increased equity.

Finally, the home's equity can be increased by making improvements to the property. Improvements are expected to increase the potential market price of the home by more than the expense of the improvements. Home improvement projects are one of the major reasons for obtaining equity loans.

Why a Loan is Obtained

A loan on the value of the equity, sometimes called a second mortgage, is usually taken out when the homeowner needs significant cash with a relatively low interest rate. A homeowner may discover that home equity loans have lower interest rates than all but a few credit cards and other installment debt. Cash from a second mortgage may be used to zero out high rate credit cards or other charge cards.

Sometimes money obtained from the loan is used to pay for schooling for the homeowner or family member. If major medical expenses have accumulated, a home value loan may be used to eliminate these debts. Any large outlay of cash that is not available through other means can be covered through a loan against the equity of your home.

Factors to Consider

Some of the components that enter into the picture during the application for a second mortgage are the loan amount, the interest rate, the term of the loan and creditworthiness of the borrower. The lender will undoubtedly call for an appraisal to determine if the increased market value provides equity that is more than the value of the second mortgage principal amount.

On the borrower's side, a home equity loan comparison means looking at the entire personal financial picture, both in the present and in future projections. The homeowner must consider the ability to repay, whether or not the costs and fees applied to the loan will outweigh the immediate benefits, and the terms of the loan itself. As with any legal document, make certain you understand the true cost of the loan and all the terms that go along with it.



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