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Home Equity Loan Basics

If you need to borrow money for home improvements, and a home equity loan (HELOCS) may be a useful source of credit. Initially at least, it provides you with money at relatively low interest rates. And they may provide you with certain tax advantages, such as tax deductible interest payments. (Check with your tax adviser for details.) However, it is a lien on your home.

Home equity lines of credit require you to use your home, in addition to your existing mortgage, as collateral for the loan. This may put your home at risk of foreclosure if you are late or cannot make your monthly payments. Some type of loans with origination fees, closing costs, appraisal fees and a large final (balloon) payment, may require you to borrow more money at a higher interest rate to pay off the debt. If you sell your home, you are required to pay off your current mortgage and credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more than necessary.

Remember too, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your real estate, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed monthly payment amounts.

You also may want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money. In addition, you may want to ask about loans for specific items, such as cars or tuition.

How Much Money Can You Borrow?

Depending on your creditworthiness (your income, credit rating, etc.) and the amount of your outstanding debt, home equity lenders may let you borrow up to 85% of the appraised value of your home minus the amount you still owe on your first mortgage, also known as loan to value. Ask the lender about the repayment period of the home equity loan, whether there is a minimum withdrawal requirement when you open your account, and whether there are minimum or maximum withdrawal requirements after your account is opened. Inquire how you gain access to your credit line, with checks, credit cards, or both.

Also, find out if your home equity plan sets a fixed draw period when you can make withdrawals from your account. Once the draw period expires, you may be able to renew your credit line. If you cannot, you will not be permitted to borrow additional funds. Also, in some plans, you may have to pay your full outstanding balance. In others, you may be able to repay the balance over a fixed time.

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