Home Equity Basics
"Home Equity" is a phrase that is used to describe a homeowner's owned share of the home, or more specifically, the value of that share in a home.
Your homeowner equity is calculated by starting with the appraised value of a home and subtracting the mortgage balance and or any other liens against the property.
The largest source of wealth for the average American Homeowner is their home equity.
Home Equity Loans
Home equity loans are financial products that allow Homeowners to tap into their earned and accumulated equity or home value that is in excess of their mortgage balance. The loan is secured by the property. It is important to note that typically the claim on the property is not the priority debt to be paid in the case there is a foreclosure. There is usually a first mortgage and maybe even a second mortgage that will be paid first.
Equity Loan Products for Homeowners
- Traditional Home Equity Loan
- Second Mortgage
- Revolving Home Equity Credit Account
Characteristics of a Home Equity Loan
- Generally, a home equity loan is an additional lien or secured loan taken out on a property. This implies that there is already a mortgage loan taken out in the home.
- Lower interest rates and overall borrowing cost when compared to a personal loan or credit card account. This is simply because it is a secured loan.
- Higher interest rate and cost than a traditional mortgage.
Homeowner Benefits of the Home Equity Loan
- Excellent source of capital for the working man. Home equity borrowing has allowed millions of everyday Americans to obtain the funds they need to start a business, consolidate high-interest debt, and many other financial needs have been satisfied with a home equity loan.
- Allows borrower to obtain a loan with a low-interest rate. Which can be used to pay off credit card debt
Equity Loan Risks
These loans have allowed Americans access to capital that has helped build vibrant businesses, funded debt consolidation loans that have let millions of Americans realize significant savings from cutting their borrowing costs, and the countless other benefits derived from this type of loan product.
Despite the wonderful opportunity home equity loans have provided homeowners there is a dark side to the home equity loan that has haunted thousands of homeowners.
There is a risk of losing your home whenever you decide to borrow against it. If you don't pay as agreed in the loan contract then your lender has the right to foreclose on your home.
Borrowing against home equity has caused millions of homeowners to default on their mortgage payments and fall into foreclosure.
Many Americans are struggling to stop foreclosure and retain ownership of their home.
Millions of Americans have lost their home to foreclosure over the last decade. Due to the housing bubble, the equity so many Americans had accumulated over the many years of making those monthly mortgage payments now no longer exists. It collapsed and vanished alongside the housing market during the subprime mortgage crisis.
Homeowner Downside of Home Equity Loans
- Risk of foreclosure
- Complications between lenders
- Housing market risk
- More expensive the traditional mortgage
- Investment of funds obtained fails or falls through
The bottom line is that home equity loans can be a great financial tool if used responsibly. If used recklessly it can lead to financial disaster including foreclosure and drastic credit score damage.