Home Equity Loans 101

There are many reasons to consider a home equity loan or a home equity line of credit, commonly referred to as a “HELOC”. Maybe you need to make repairs to your home or you want to expand your living space.
Home equity loans can provide the much needed cash for any number of personal needs. Many fail to consider that this money can be used for other reasons as well. Perhaps you need to purchase a car or pay for your child’s college tuition.
But, before you get too excited about the “shopping spree” that is starting to fill your mind, let’s take a closer look at what we are really talking about. A home equity loan is basically a loan from the bank against the value of your home that is over and above any money owed on any liens against it. So, if you owe $50,000. on your home, and it is determined by an appraiser that the value is $75,000, then you have $25,000. in equity in your home.
This does not mean that a bank will hand you $25,000 to what you please. It means that they will allow you to borrow a percentage of that $25,000, usually up to 80% of the total appraised value, in this case, of the $75,000. That means that for our example, 80% of $75,000 (appraised value) is $60,000. If you owe $50,000 already, then the bank will allow you to borrow $10,000 more.
You must remember that this is a loan, and not free money. It must be paid back, with interest. If you decide to sell you home after a year, this debt must be paid off along with any other mortgages that you have for the property.
Also, you must consider that if you take out this home equity loan that your homeowners insurance policy needs to reflect the new “borrowed amount.” That means that most times, you will be required to raise the value of your homeowners policy, which will in turn raise your premium. This amount will vary from very little, to quite a bit depending on how large your home equity loan amount actually is.
You also must decide if you want a home equity LOAN, or a line of credit (HELOC). The difference is that a home equity loan is just that… a loan. You sign the papers and the bank cuts you a check. You do what you will with it, and then repay the loan. A HELOC is a line of credit. With this, when you sign the papers, you leave the bank without a check. Most banks will issue you blank checks for your HELOC. Any check you write, whether it is for $100 to buy groceries, or $10,000 to buy a car gets added to your HELOC balance just like a loan. You then make your payments. These payment amounts will vary depending on how much your borrowed amount is.
If you pay the money back, with a HELOC, you simply have a zero balance, and the money is there for you to borrow again. With a loan, when you pay it back, the account is closed and you would need to re-apply for a new loan.
Either way, you can use this money for any unexpected emergencies or to turn your home into what you always dreamed it could be. And as an added bonus, most times, the interest on these loans are tax deductible, though I would recommend checking with your tax professional to be sure that your situation will allow a tax write off.