How Much Does a Home Equity Loan Cost?

If you're a homeowner, your mailbox is most likely consistently flooded with offers for home equity loans. At first glance, they may seem like nothing more than a slightly more generous credit card offer, if you stop to read the details, it can seem pretty appealing: a low-interest loan that gives you immediate access to cash with payments added right into your monthly mortgage payment. Although it may seem that nothing can go wrong here, it's important to understand what this type of loan actually is and how much it costs.

Function

Although it is most often used to fund home improvement costs, a home equity loan can be used for any reason. From paying off credit cards to funding a family vacation, the homeowner can use the cash he receives in any way he desires. Generally, a homeowner will contact his lender who will then determine the amount of equity available for the homeowner. To determine the amount of equity in the home, the lender will have someone from its company come out to appraise the home. The appraised value will then be used as the overall value of the home. The amount of money owed on the home (whatever is left on the original mortgage) will then be deducted from the total value to determine the total amount of equity available to the homeowner.

Types

There are two types of home equity loans: a general home equity loan and a home equity line of credit. A general home equity loan is often referred to as a second mortgage because the borrower uses her home as collateral to receive the funds. A home equity line of credit, on the other hand, is a form of revolving credit (like a credit card) that also uses your home as collateral. With a home equity line of credit, you are approved for a specific amount of credit and can use as much or as little of the funds as you need. As long as you have credit available, you can continue to reuse it (just like a credit card). On the other hand, with a general home equity loan, you receive all the funds at once, and those funds cannot be reused without applying for an additional loan.

Benefits

The biggest benefit of a home equity loan or a home equity line of credit is that the interest you pay on the loan is tax-deductible. Additionally, both types of home equity loans generally offer attractive interest rates and minimal fees. What's more, when a home equity loan is used to pay off other types of debt--such as credit cards and automobiles--the new consolidated monthly payment amount is often substantially less than the total of all the previous monthly payments.

Considerations

Before selecting a home equity loan or home equity line of credit, there are several factors to consider. First, it's important to understand that a home equity loan has a fixed interest rate. The rate is determined at the beginning of the loan and remains the same throughout the length of the loan. A home equity line of credit, however, has a variable interest rate, which means it can go up or down, depending upon the national interest rates. In addition, make sure you check for hidden fees such as closing costs, appraisal fees and attorney fees.

Warning

It is important to understand that you are borrowing against your house when taking out a home equity loan. This means that, should anything happen to prevent you from making the agreed upon payments, the lender may be able to take your home. In addition to those hidden fees, homeowners who face financial difficulties in the future may face the risk of foreclosure if they are unable to make their monthly payment. Despite the low upfront cost, the long-term cost of taking out a home equity loan can be quite severe. As a result, home equity loans are a better option for homeowners who have a stable and secure financial future.

Resources

• The Costs of Home Equity Loans