Understanding Home Equity Loans by Shirley Veron, CPA

With the recent real estate market growth, many homeowners have started to explore home loan refinance options, such as home equity loans and home equity lines of credit (HELOC), in order to leverage the gains in their homes. Home equity loans are home mortgages that enable homeowners to free up cash from their original home mortgage in order to make additional investments such as home renovation, college education, or debt consolidation.

As opposed to new home mortgages, home loan refinance allows you to apply for a loan amount greater than the previous loan amount, yet they are similar in the sense that both home loans are secured by collateral. PersonalHomeLoanMortgages.com provides a useful resource for homeowners to learn more about home mortgages and home loan refinance options.

HELOC differs from traditional home loans because it gives homeowners access to an open line of credit, where only the outstanding balance accrues interest. Additionally, HELOCs provide flexibility by allowing you to borrow money as needed. In contrast, home equity loans are more suitable if you need to pay a large amount all at once, such as consolidating your debt. Home equity loans and lines of credit are attractive home loans due to the fact that they are tax deductible and generally offer lower interest rates than credit cards.

In order to gain access to these type of home equity loans, borrowers must meet specific criteria established by lenders but some typical determining factors include things such as your income, credit history, and the loan-to-value ratio of your property. The loan-to-value ( LTV ) ratio of your home is calculated by dividing the fair market value of your home by the amount of your home loan. For example, a house valued at $100, 000 with a $75,000 home loan and down payment of $25,000 is said to have a 75 percent LTV ratio, because the loan is worth 75 percent of the property's value.

Finally, a borrower should also be prepared to pay a certain percentage of the overall home loan as a lender fee. These fees usually range anywhere from 2 to 5 percent and may include, but are not limited to, things such as appraisal costs, document preparation, and application costs.

To learn more go to Understanding Home Equity Loans.