Home Equity Loan, Loans & Mortgages, Mortgage Basics, Refinance Mortgage, second mortgage, mortgage finance   Home Equity Loan, Loans & Mortgages, Mortgage Basics, Refinance Mortgage, second mortgage, mortgage finance 
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Home Equity Loan

Home > Loans & Mortgages > Home Equity Loan

Home Equity Loan, Loans & Mortgages, Mortgage Basics, Refinance Mortgage, second mortgage, mortgage finance
In recent years, banks and other institutions have begun offering credit lines secured by your home or other property the home equity loan. Once the credit line is approved, you may access it as needed by writing a check. You are charged interest only on the amount you actually borrow and rates typically are low because the loan is secured by your property. Some institutions allow you to defer repayment of the principal by making interest-only payments. In some cases, the bank may charge loan origination fees and an annual fee for maintaining the line of credit.

If your home is appraised at $70,000 and the mortgage balance is $50,000, you may qualify for a $6,000 credit line up to 80 percent of the market value of your home ($70,000 x .80 = $56,000). The funds are available to you on demand with no additional approvals necessary. If you do not use the funds, there will be no interest charge. As you repay the funds, they are added to the amount of credit available.

For example, suppose you qualified for a $5,000 line of credit with a local bank. You would receive a special checkbook to use in drawing funds from the bank. If you drew $1,000 from the account, you would be charged between 1 percent and 1-1/2 percent a month on the outstanding balance, and your available credit would be reduced to $4,000. If you repay $100 in the first month, $15 would be applied to interest, and the remainder to the principal. Your line of credit would be $4,085 and you would have $915 outstanding.

Overdraft protection on checking accounts is a form of credit line that you should consider obtaining even if you have no intention of using it. Such protection provides cheap insurance in case you make a mistake or encounter an emergency that requires immediate cash.

While second mortgages and a home equity line of credit are relatively easy to obtain, the caveats that apply to any credit transaction still apply: Never borrow more than you can afford to repay, and make sure you repay the loans promptly. Remember, the lender has claims to a portion of your property and can block a future sale until those claims are satisfied.

Over the next few years, lenders may begin offering even more appealing, easy ways to refinance homes in an effort to compensate for lost credit-card and installment loan business. Be especially cautious about borrowing this way: You wouldn't want to jeopardize the roof over your head for a new washing machine.

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