equity loansEquity Loans, whether a home equity loan or a line of credit (HELOC), reduce or may even eliminate the equity that you have built up in your home. Equity loans draw on the cash you would have if you sold your house and paid off your mortgage loans. “Equity” is the difference between your home’s market value and the amount you owe on it. These loans are secured by using your home as collateral, and you could lose your home if you are unable to make the loan payments, . Equity loans allow you to borrow more money than with any other form of credit, and the terms will be better than with other types of loans.

If you are thinking about using your home to secure a loan, you might also want to consider a traditional 2nd mortgage. A second mortgage provides you with a fixed amount of money repayable over a fixed period. In most cases the payment schedule calls for equal payments that will pay off the entire loan within the loan period.

You might consider a second mortgage instead of a home equity line of credit if, for example, you need a set amount for a specific purpose, such as an addition to your home. Once approved for an equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. Typically, you will use special checks to draw on your line. Under some plans, borrowers can use a credit card or other means to draw on the line.

The federal Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. And in general, neither the lender nor anyone else may charge a fee until after you have received this information. You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term (other than a variable-rate feature) changes before the plan is opened, the lender must return all fees if you decide not to enter into the plan because of the change.

Compare equity loans from at least four reputable lending institutions. All will probably quote you a different rate. Tell them you are shopping for the best rate, and make them compete for your business.

Depending upon your “credit-worthiness” (your income, credit rating, etc.) and the total amount of your unpaid debt, lenders may let you borrow up to 85% of the appraised value of your home minus the amount you still owe on your first mortgage.

Inquire about the length of the loan, whether there is a minimum withdrawal provision when you open your account, and whether there are maximum or minimum withdrawal stipulations after your account is opened. Ask how you obtain access to your credit line – with credit cards, checks, or both.

Determine if your home equity plan specifies a fixed time – a draw period – when you will be able to make withdrawals from your account. Once the draw interval expires, you may be permitted to renew your credit line. If you cannot, you will not be able to borrow additional funds.

Some home equity plans require you to pay the full remaining balance. In other plans, you can repay the remainder over a fixed time.

A home equity loan will allow you to use some of your home’s equity to:
* Relieve an overwhelming debt burden. If you have trouble making the minimum payments on your bills every month, you can take out a home equity loan and consolidate your debts.
* Buy a new car with a low interest, tax deductible loan. Why pay outrageous interest charges on a standard auto loan when you can pay for your car with a loan that has a lower interest rate and is tax deductible?
* Make improvements to your home that will increase its value. Do you need to add on another bedroom or finish the basement? A home equity loan will enable you to add value to your home while making it more functional.
* Finance your child’s education. Do you have a child who is ready to start college? Do you want to further your own education in order to qualify for a higher paying job or switch careers? A home equity loan can help you pay for it.
* Start a business. Maybe you have a life-long dream of being your own boss. Do some research, decide what you want to do, and finance your new business with tax deductible home equity loans.

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