Unfortunately, most of us will at some point experience a situation in which we need money that we simply do not have. Your home is a fantastic asset and one that you may be able to use to your advantage in the situation. In order to get through this tough times, refinancing could be a good option. There are numerous ways to refinance on a home, one of which is the home equity loan, allowing you with rapid access to money when you need it.

Understanding the Home Equity Loan

A home equity loan, also known as home equity line of credit or HELOC,  is a type of loan in which you borrow against the part of your home that is no longer mortgaged. Usually, there is a cap on this, meaning that the total amount borrowed against the value of your home can never exceed 85% of its total value. In simple terms, if you have a property that’s worth $100,000, and your mortgage is only $50,000 outstanding, then you could potentially borrow $35,000 through a HELOC.

One of the great advantages of the HELOC is that you don’t get a lump sum of money in your account as you would with a standard loan. Instead, you will be given access to the money and you can withdraw it as and when you see fit. Sometimes, your lender will have some requirements on that, such as needing you to withdraw a minimum amount each time or using up your line of credit within a set period of time. It is important, therefore, that you speak to your financial advisor so you know exactly what is involved in this type of loan construction.

It is very important that you spend some time shopping around for your home equity line of credit. Different lenders will give you lots of different opportunities and it is important that you find one that best meets your particular needs. Hence, make sure you obtain at least three different quotes from the different lenders so that you get a good idea of what is out there. It is common for the interest rates on these types of loans to be variable, determined by an index. Checking up on which index is used is important but also on whether or not there is a cap on the variable interest rates. Because there have been so many changes in the interest rates as of late, it is important for a cap to be in place so you don’t suddenly end up paying far more.

You also need to consider the costs that are involved with taking out a home equity loan. Those may include:

  1.  The appraisal fee.
  2.  Various upfront charges.
  3.  Closing costs on the loan.
  4.  Interest rates.
  5.  Account fees.

A home equity loan is a serious financial commitment so it is important that you gain a good understanding of the advantages and disadvantages of these instructions before deciding whether or not to go for it.