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.
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.
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.
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