Home ownership is a wonderful investment that typically results in profits
for owners. According to statistics from the Federal Reserve, most people
who sold their homes in the last five years received an average net capital
gain of more than $25,000. You can make use of your investment not only
when you sell a house, but also while you are still living in your home by
using your home's equity. To determine the equity in your home, simply
subtract how much you owe on your mortgage from what your house is worth on
Generally you can borrow against a majority of the equity in your home.
Some lenders will allow you to borrow against all of, and occasionally more
than, the total equity in your home. Your first mortgage plus any equity
loans can usually total from 70 to 90 percent of the value of your home.
Borrowing against your home's equity has some positive and negative aspects.
On the positive side, you receive money to spend that is generally tax
deductible, unlike a credit card. The negative side is that you incur some
risk, since your house is serving as collateral for the loan, and some of
your equity options may not be tax deductible.
You will find three options to using the equity in your home: refinanced
mortgages, home equity loans, and home equity lines of credit.
Refinancing your mortgage allows you to change the terms of your mortgage
for something better-like a lower interest rate. When you refinance the
mortgage amount with some or all of your equity you can receive the equity
A home equity loan, sometimes called a "term equity loan" or a "second
mortgage," allows you to borrow cash against your equity without changing
the original mortgage. You receive a lump sum of cash that you must pay
back in monthly installments over the next 10 to 20 years. You will
generally receive a fixed rate on this type of a loan, and the loan will
usually be tax deductible.
Home Equity Lines of Credit (HELOC) generally have few up-front costs once a
lender has approved your credit. The lender will provide you with a credit
card or checkbook, which allows you to spend the equity in your home. A
HELOC is usually tax deductible, but may come with an annual fee. Also be
aware that you may not receive a fixed rate of interest on the money you
borrow, making your repayment subject to fluctuations in the marketplace.
As you are researching the kind of loan that is right for you be sure to
read and understand the terms and conditions and what they mean to your
particular financial situation. Be cautious of low introductory rates that
disappear shortly after you begin repaying the loan since these rates aren't
going to significantly affect your ability to pay off the loan.
Sources used in this article include www.mortgagefaq.com and