What is a Home Equity Loan?
A home equity loan is a loan that uses your house as collateral. Your equity in your home is the value of your home minus what you owe on your home. Example:
Value ($200,000) - Owed ($100,000) = Equity ($100,000)
In
the above example, you have a $100,000 of equity in your home. Based on this,
most lenders would allow you to borrow up to $60,000 via a home equity loan.
This is because most lenders do not like the loan-to-value (LTV) ratio to
go above 80%. So if you take what is owed ($100,000) and add your home equity
loan of ($60,000), your LTV would be $160,000 of the $200,000 house value or 80%
What are the types of Home Equity Loans?
- Standard
- Home Equity Line of Credit
- Cash-out refinancing
What are the advantages of a Home Equity Loan?
The two main advantages are lower interest rates and to the tax benefit associated with it. You can use a home equity loan to:
- Consolidate your debt
- Improve the value of your house
- Education
- Major purchases like cars, boats, and vacations
- Finance a business or investment
- Basic living expenses
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