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Equity, put simply, is the amount of your home value that you own. It's the
difference between the property's present market value and the outstanding
loan balance and any liens. Many times people take out a loan against this
equity.
Let's say your home was worth $80,000 when you bought it. You've paid off
$10,000 of the loan used to buy your home, plus your house has appreciated
in value $20,000. If your home now has a market value of $100,000 and an
outstanding loan balance of $70,000, you'd have $30,000 in equity. Loans
against equity have become increasingly popular because of several factors
including: (1) steadily rising home values have increased the equity in
people's homes; (2) the interest rate on loans borrowed against a home is
usually lower than other forms of personal loans and; (3) the interest
payments made on a home equity loan are tax deductible subject to specific
limitations. New Century Mortgage always suggests consulting with a tax professional to
determine the applicability of any tax deduction to a borrower's individual
circumstance.
Home equity loans usually come in two varieties: the traditional
second mortgage and a home equity line of credit.
The Second Mortgage
Second mortgages, just like your first mortgages, are loans that use your
house as a guarantee that you will make your payments. Your Mortgage
Consultant will be able to explain the advantages of obtaining a home equity
loan in the form of a second mortgage ' such as the assurance of obtaining a
fixed interest rate. However, you should remember that just like your first
mortgage, you expose yourself to the risk of foreclosure if you should run
into any unexpected financial problems, such as a job loss, and are unable
to repay your first or second mortgages.
Home Equity Lines of Credit
A home equity line of credit works similar to a credit card or revolving
line of credit. Your bank provides you with a checkbook that is used to draw
against your line of credit. You can write checks for major purchases, such
as a car or medical expenses, or just draw out some cash and go on vacation.
Advantages of obtaining a home equity loan in this manner include: (1) the
flexibility to borrow only as much money as you need at the time and (2) the
potential to receive a lower interest rate* versus a second mortgage loan.
Please consult your Mortgage Consultant for more detailed information.
* Home equity lines of credit typically involve variable rather than fixed
interest rates. The variable rate is based on publicly available index (such
as the prime rate or a U.S. Treasury bill rate). Thus, as the index changes,
the interest rate you pay may increase or decrease. The effective rate of
interest you pay over the course of this loan may be higher or lower if you
had obtained a fixed rate second mortgage. Thus, you should carefully
consider the risks and rewards of this type of loan.
Refinancing
Refinancing is a means of replacing high-interest debt with a loan that has
a lower interest rate. But it can also be done in order to switch from a
fixed to a variable rate, or vice versa, or to eliminate a balloon payment.
A cash-out refinancing is one that involves you paying off your loan and
borrowing an additional amount. The entire loan amount is secured by a lien
on your home.
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