Applying for a Home Equity Loan
Posted on Friday, August 8th, 2008 at 2:40 pm
If you are a homeowner, one of the ways that you can borrow larger sums of money at extremely attractive interest rates is by applying for a home equity loan or home equity line of credit. Taking out either a home equity loan or line of credit is not something that you should do without careful planning and consideration. In fact, those that take out home equity loans without knowing all the facts can harm themselves financially. Here are some tips on choosing and applying for a home equity loan.
A home equity loan and line of credit uses your homes equity which is defined as your home’s current value, less the debt (mortgage) as the basis for the loan. You put your home up as collateral in order to secure the loan, which means if you fail to repay it; the bank can sell your home to recoup its losses. However, for many savvy homeowners, a home equity loan is a great financial tool that empowers them with extreme leverage when they need to purchase or invest in big ticket items such as a home addition, new kitchen, college or a once in a lifetime vacation.
Applying for a home equity loan or line of credit is usually much less intensive than a primary mortgage, however, you should expect the lender to look at your credit report, your current income and loan to ratio value (LTV), which is the amount that you owe for your home versus the amount that it is worth. Usually, the process entails an appraisal of the home by the bank to figure out how much exactly the home is currently worth, compared to when you purchased it.
Once you apply for a home equity loan or line of credit and are accepted, you will usually need to pay both fees associated with the equity loan and closing costs. Some of the fees that are generally involved in taking out a home equity loan or line of credit are the application fee, title and search fee, the cost of an attorney or title agent and other types of document preparation. While closing costs and fees aren’t prohibitive, they can cost several hundred dollars or in many circumstances several thousand, usually depending on the amount of the loan taken out. However, the costs do not stop there, once you start repaying your home equity loan, you will need to pay interest on the loan. It is important to note that in most cases, the interest that you pay on a home equity loan is tax deductible. You should speak to your accountant for your specific circumstance.