Should You Apply for a Home Equity Loan?

Hard economic times are leaving many Americans struggling to make it from paycheck to paycheck. If your financial burdens are mounting, one option you may want to consider is a home equity loan. If you are paying monthly bills with credit cards, you will find cheaper rates for home equity loans if you qualify. Home equity loans can begin as low as 6 percent interest, far cheaper than most credit cards' rates

.Reasons to Apply for a Home Equity Loan

Freeing up the equity in your home through a loan can make much needed cash available to you. Some reasons you may want to consider applying for a home equity loan are college tuition payments, debt consolidation, home improvements or to pay off medical bills. You should not apply for a home equity loan simply for extra spending cash. A home equity loan is a secured loan. If you fail to repay, you risk losing your home.

Home Equity Loan (HEL)

You may want a HEL for a specific one-time purchase requiring a large sum of cash, possibly purchasing an automobile or adding on to your home. Some lenders will allow you to borrow up to 125 percent of the value of your home. You will need to provide proof of home ownership and income. Many lenders require an appraisal and require 20 percent of the home's value to be paid off. Fixed payments of principal and interest can run over terms from as short as one year up to 30 years. You will receive a lump sum payment. Some fees may be involved including closing costs. Closing costs for home equity loans are generally lower than closing costs for first mortgages. The interest may be tax-deductible.

Home Equity Line of Credit (HELOC)

If you will have an ongoing need for available cash, the HELOC is a better choice. It is a revolving line of credit and you can withdraw the funds whenever needed through a special check or credit card associated with your account. Cash withdrawal amounts are usually predetermined, and you may be required to maintain a minimum amount outstanding. A HELOC may carry a lower adjustable interest rate than a HEL, and there are usually no closing costs. The rates for HELOC's fluctuate according to the prime rate. Typically, you will need to provide proof of ownership, income and may be required to obtain an appraisal. As with the home equity loan, you may borrow up to 125 percent of the home's value and interest payments are often tax deductible. Some HELOC accounts require minimum payments, which may be as small as the interest only.

Shop for the Best Rates

You should do some research and shop different lenders' rates. Home equity loan rates can start as low as 6 percent or be as high as 21 percent. You obviously do not want a 21 percent home equity loan. You should talk to your lender about fixed fee limits for your loan. For an additional fee, the lender may offer to lock in maximum increases and decreases on the rate of your loan. This will help to ensure you will always be able to meet the monthly minimum payment amount. Negotiate for the best rate from your lender, especially if you have excellent credit.

Final Considerations

Home equity loans are essentially second mortgages. Keep in mind your home is on the line should you fail to repay. If easy credit tempts you to run up bills you will be unable to pay, a home equity loan may not be the best option for you. Make sure you have given enough thought to how you will repay the home equity loan. Regardless of the type of loan you choose, when the plan ends, you will owe the balance in full. You must be prepared to pay if you are unable to finance for a second term. If you sell your home during the term of the loan, you may be required to pay the balance in full immediately.

Sources

http://www.mortgageloan.com/

http://www.bankrate.com/brm/news/college_guide_2007/financialadvice/home_loan_rates.asp?caret=3h