Home Equity Loan Basics You Need to Know

If you are a homeowner considering a home equity loan for any reason, there are several things you need to know before applying. Doing your homework and researching mortgage lenders will help you avoid common mistakes that could cost thousands of dollars. Here is what you need to know to avoid these costly mistakes.

Home equity, when used correctly, is one of the most powerful financial tools available to homeowners today. When home equity is abused it has the potential to land you in serious financial hot water. Taking out a home equity loan is simply a second mortgage loan secured by your property. If you default on the home equity loan the lender will foreclose and take your home.

Types of Home Equity Loans

Home equity loans come in two flavors: home equity lines of credit and second mortgages. A second mortgage pays a lump sum similar to your primary mortgage at a fixed interest rate. Home equity lines of credit allow you to borrow by writing checks or using a debit card against your equity. Equity lines of credit come with variable interest rates and are typically more expensive than a second mortgage. Home equity lines of credit have the advantage of allowing you to borrow smaller amounts that you can repay quickly; this could save you money depending on your reasons for borrowing equity.

How Much Can You Borrow?

The amount of equity you will qualify to borrow depends on the appraised value of your home, the balance of your principal mortgage, and the amount of equity you have in your home. The mortgage lender will evaluate the loan to value ratio of your home, the appraised value of the property, and your credit rating when determining how much you can borrow.

Other Options

Refinancing your primary mortgage with cash back is another option that could save you money over a home equity loan. You will need to carefully consider the costs associated with taking out a second mortgage or refinancing. Both options have similar costs: application fees, lender fees, and closing costs are a part both of home equity loans and refinancing with cash back. To avoid overpaying for your home equity loan you need to do your homework and research home equity lenders.

To learn more about avoiding common mortgage mistakes that will cause you to overpay for your home equity loan, register for a free mortgage guidebook using the links below.
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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing: What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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