A home equity loan can be a very useful financial tool for home owners. With a home equity loan a homeowner can tap into their home's equity and use the proceeds to finance home improvements, vacations or to consolidate debt. Home equity loans are also referred to as home improvement loans and equity loans.
How does a home equity loan work?
When you apply for a home equity loan, the lender will have your home appraised to see how much it is worth. If you currently have a mortgage loan against your home, the lender will subtract the outstanding loan balance from your home's appraised value. The resulting value is the amount
of equity you have in your home (home equity). The lender uses the value of your home equity to determine how much you can borrow for a home equity loan.
-- Credit Tip by FindLocalBanks.com
Federal law requires that all creditors must state the cost of their credit in terms of an Annual Percentage Rate (APR). This rate takes into account how the loan is repaid on a yearly basis, and allows you to accurately compare the cost of credit among lenders. For example: You borrow $1000 for one year and pay a finance charge of $100. If you can keep the entire $1000 for the whole year and then repay $1100 at year’s end, you are paying an APR of 10 percent. But if you repay the $1000 and finance charge (a total of $1100) in twelve equal monthly installments, you don’t really get to use $1000 for the whole year. In fact, you get to use less and less of that $1000 each month. In this case, the $100 finance charge amounts to an APR of 18 percent.
How much of a home equity loan can I qualify for?
A lender will base your allowable home equity loan on a percentage of your home's equity. Conservative lenders will limit your home equity loan to 80% of your home equity, while more aggressive lenders will allow a borrower home equity loan to exceed the home's appraised value.
When getting a home equity loan, you can either get a fixed rate loan or a home equity line of credit (HELOC).
With a home equity line of credit loan, you are given a maximum amount that you can borrow from any time. You only pay interest charges on the amount of the home equity loan that you are actually using at any particular time.
-- Credit Tip by FindLocalBanks.com
The finance charge is the total dollar amount you pay to use credit. It includes interest costs and other costs, such as service charges and some credit-related insurance premiums. For example: Suppose you borrow $1000 for one year, and the interest is $100. If there is a service charge of $10, the finance charge will be $110.
What is the interest rate on a home equity loan?
A lender typically bases the rate on their home equity loans on their Prime Interest Rate (the interest rate they charge their most credit-worthy borrowers). The lender will then either add or subtract a percentage (typically 1-2%) from their Prime Rate to determine the interest rate you would be charged on your home equity loan. This percentage will depend on your credit and the amount of money you wish to borrow.
