You might have heard a lot about the home equity loan from friends or co-workers, but still you are not sure what it is and how it works. But really, what is a home equity loan? To understand what it is and how it works, first we need to know what home equity is. To be able for you to have home equity, of course, you should have or own a home. Your home can be your best asset and no matter how much money you are making at present, the time will come when you need a considerable amount of money - not just a little extra - but a large amount of money. And don’t say that that’s not going to happen, because we don’t know what the future has in store for us.

Home equity is the difference between the current market value (appraised value) of your home and the outstanding mortgage balance. Therefore, if -

Your home’s appraised value is $ 100, 000

Your outstanding mortgage balance is $ 50, 000

Your home equity is $ 50,000

Now that you know what home equity is, it’s time for you to ask “what is a home equity loan”? A home equity loan has two major types; the home equity loan and home equity line of credit. A home equity loan or a home equity line of credit allows you to borrow money using your home’s equity as collateral. Both types actually put your home in the hands of the lenders. If you are not able to pay your dues, this could mean the loss of your home. So, be very careful in dealing with this kind of loan.

To compute for your potential credit, most lenders set a percentage of your home’s appraised value minus the balance owed on mortgage. The exact amount in which you can borrow also depends on some factors like your ability to pay, debts, and other financial obligation. Given the above example:

Your home’s appraised value $ 100, 000

Percentage x 80 %

Percentage of appraised value = $ 80, 000

Less balance owed on mortgage - $ 50, 000

Your potential credit is $ 30, 000

Now that you know what home equity and a home equity loan are, the next thing you should be asking is, which home equity loan is best for you? To find which home equity loan is best for you, determine the purpose of your loan and how long you want to pay it, in terms of years. In order for you not to get hooked-up on debt for a long time, borrow only the amount you need for a specific purpose only.



Thanks to T J Madigan for contributing this article to our Equity blog:

Mortgage Refinance Rates

Equity is the value of your home at current market value after deducting the outstanding mortgage on your home, which is what you would have left over in the event that you sold your property at market value and repaid your outstanding mortgage. Home equity is built over time; as equity builds, you create a pool of money which your can utilize it later for many purposes.

In general, it is unadvisable to spend your equity money on things that do not give you ROI (return on investment) such as frivolous vacations. Use your home equity to clear your bad debts is actually a type of spending on your equity money. You could avoid yourself from trapping into debts by carefully plan your budget and spend with what you earn.

A smarter way of using your equity is use it to grow your equity further, spend on things that will bring you ROI. Ways to use your equity smartly include:

Start Your Own Business

You can use your home equity to borrow a low interest loan to generate the capital necessary to start your own business. Just be sure that you have a sound business plan in mind and that you have other safety cushions in place.

During the initial stage of your own business, you could maintain your reliable first income stream (to protect you against any cash problems) while working to bring your own business up to the stage.

Home Improvement

A better home condition will increase your home’s resale value. Hence you can dip into your equity to generate funds for home improvement. Your home improvement project will improve your home condition and provide you with a more comfortable living, and you could get a higher resale price whenever you want to sell it. But remember that not all home improvement projects will contribute equally to your homes resale value.

Children Education

Growing equity is a great way to generate fund for your children education needs. You can get loan against your home equity for your children educational needs. Using your equity to invest on your children education will get them a brighter future and at a better position to compete in the challenging job market.

Improve Your FICO Score Debt is unavoidable for many people as long as we have credit cards, mortgage or car, but you could prevent yourself from trapping into bad debts condition by carefully planning your budget and spending with your financial affordability. Instead, your equity can help you to improve your FICO score. By paying off creditors, you can improve your FICO score and potentially qualify for a lower refinancing rate. To make the most out of this process, know your interest rates, for both savings and debts. You can get help from expert such as an accountant to help you with the calculations. With so many rate variables in play, its easy to get confused about how to consolidate, how to pick the right term for your home equity loan, and how much to allocate to savings and how much to allocate to payments.

In Summary

Home equity is the money you have put down against the principal of your house as a savings account, be aware that if you fail to budget effectively and over draw your equity. You could lose your house, wind up in credit trouble, or even have to file for bankruptcy. Hence, use your equity smartly is a great way to pursue your wealth building.

Cornie Herring is the Author from http://www.studykiosk.com/CreditBasics. “StudyKiosk-Credit Basics” is an informational website on credit basics, debt consolidation and bankruptcy.



Thanks to Cornie Herring for contributing this article to our Equity blog:

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