Home Equity Loan Calculator

Deciding to take out a home equity loan is a huge decision. Failing to recognize the significance of this financial decision can place you or your family in financial distress. Before you take out a home equity loan, consider all of the variables and your options.

What is the purpose of the loan?

Although you are not required to account for the reason of your loan to your lender, it should be one of the factors that you consider before deciding to take out a home equity loan. While some reasons for taking out a home equity loan can provide you with a financial decision that is favorable, others could create serious setbacks.

Taking out a home equity loan to pay for any financial obligation that would depreciate your family’s net worth is usually a poor financial decision. This can include the purchase of a car, payment of credit card debt, or luxury expenses like a vacation. If you need to purchase a vehicle or you want to pay for a luxury expense, find other means of funding it, like saving. If you want to pay off credit card debt, consider seeking credit counseling first.

Do you have other options available?

Some uses for home equity loans may not lessen your family’s net worth. However, there may be other options for funding the expense. College tuition may be covered by government grants or loans. You may be able to adjust your budget to achieve funds necessary for home repairs. Consider all of your options before entering into a home equity loan.

Consider the economy

A drop in the economy will often result in a lower face value of your home. This can occur either before, during, or after you obtain a home equity loan. This drop can result in you owing more than the home is actually worth. While the economy may recover, it could prevent you from being able to sell your home.

Do you have the resources to pay back the amount you owe?

Because you are placing your home up for collateral, failure to repay the loan, according to the terms, can result in the loss of your home. You may not be able to plan for all financial situations like a serious injury or a job loss so it is important that you have a back-up plan in case something should happen.

How much equity do you have?

Many lenders will offer you a loan amount that is more than the equity that you own. The extra cash is often tempting. Following through with this, however, places you upside down in your loan, meaning that you owe more than it is worth. Additionally, if you use all of the equity in your home, you no longer have any ownership or safety net if a financial emergency arises down the road. Because it takes a great deal of time for equity to build in your home, you may want to consider leaving a fair share of equity untouched. This will provide you with equity in the event that a financial emergency should occur.

Do you need the money now?

If you do not have an immediate need for funds, consider taking out a home equity line of credit. This will allow you to tap in to your home’s equity when it is needed. However, it is important that you manage this wisely. Excessive use could create payments that are more than you can afford and you can quickly use up your equity if you are not careful.

What is your credit status?

Because your interest rates are partially weighted on your credit, taking out a home equity loan right after credit problems will likely result in higher interest rates. Consider caring for your credit and paying off some bills before moving forward with your home equity loan.

How long do you plan to live in your home?

If you are planning on selling your home anytime in the near future, you may want to consider other options for your financial needs. Many lenders will charge you expensive prepayment penalties. If you have used a large amount of your equity, you may not have much left. This could result in a total loss when you do sell.

How much do you owe on your first mortgage?

Owing less on your first mortgage or having your home completely paid off can give you a serious advantage when applying for a home equity loan. This is because you have acquired a large amount of equity. You will still owe a large portion of your home, as long as you don’t borrow more than you need.

How much money do you really need?

You may decide that a home equity loan is your only option. In this instance, it is vital that you carefully consider how much money you really need. This can help you avoid paying interest on money that you did not need.

Home equity loan mistakes can cost you mony, sometimes thousands of dollars. By ignoring the importance of understanding them, you could place yourself in a poor financial situation. Take the time to educate yourself on common home equity loan situations that can cost dearly.

Failing to carefully go over terms

Reading financial paperwork may not be fun, but it is essential. Not reading the paperwork carefully can leave you unprotected against unethical practices. It can also cost you thousands of dollars.

Watch for introductory rates. While the rate is low initially, after the introductory period is over, this rate can increase substantially. Businesses use these introductory rates to entice home owners. Watch for what is called a “life cap” in your loan paperwork. This amount will indicate how much your loan can increase over the entire life of the loan.

If there is every any information that you do not understand in your loan paperwork, ask the lender to clarify. If you do not feel satisfied with the answer or it is not made clear to you, consider another lender. You may also consider having a financial advisor go over the loan paperwork with you. Even if you have to pay for this service, it could save you thousands, making the cost of a financial advisor well worth the cost.

Not taking care of your credit

Your credit is one of the determining factors in your home equity loan. By failing to care for your credit, you leave yourself open to experiencing higher interest rates. Poor credit management could also indicate that you should reconsider your decision to obtain a home equity loan.

Not being aware of the differences in home equity loans

Home equity loans come in two types; home equity lines of credit and second mortgages. Failing to recognize the difference can result in poor management of funds. It could also rob you of an opportunity to utilize a more favorable loan for your situation.

Home equity lines of credit allow you to tap in to your home equity in small increments, making this option rather favorable for small financial emergencies or obligations. Second mortgages are given to you in a large lump sum. These are often used for large financial purposes.

Borrowing too much money

Borrowing too much money is a risk with both types of home equity loans. However, second mortgages have a much higher risk because of the large amount you are allowed to borrow. You are charged interest on what you borrow, not what you use. Borrowing more than you need creates interest payments that were unnecessary.

Not refinancing before you obtain a home equity loan

When refinancing, lenders will look at the total amount you owe on the home. If the combined loans exceed the value of the home, you will, most likely, have a difficult time refinancing your mortgage. If you plan to refinance, do so before obtaining the home equity loan.

Failing to comparison shop

By only shopping with your current lender or personal financial institution, you are greatly limiting your options. Lower rates and more favorable terms may be available through other lenders. To obtain the best terms, obtain rates from multiple lenders and brokers. Then, take the time to analyze each loan carefully, selecting the one with the most favorable terms.

Not asking for a Good Faith estimate

When you are quoted a loan term, you should always ask for a Good Faith estimate. These are designed to protect you from interest rate increases and fees that the lender may change at the last minute. This could result in a loss of thousands of dollars.

Paying only interest

Most home equity loans will allow you to pay only interest in the beginning of the loan. While this may seem convenient, it is also poor financial planning. The sooner you start applying funds to the principal, the sooner you can have the loan paid off. By paying the loan off, even months early, you save money on interest fees.

Overlooking prepayment penalties

Some lenders shell out hefty prepayment penalties. Failing to notice these could result in a lot of lost money, especially if you plan to sell your home in the near future. If you do not see prepayment penalties in the loan agreement, be sure to ask if there are any.

Using home equity loans to pay off credit card debt

It may seem like a good idea to pay off high interest credit cards with your home equity loan. Paying high interest credit cards with your home equity can save you money on interest, if you manage your debt effectively and make changes in your spending habit. However, by paying off your credit card debt, you may be tempted to spend more, resulting in even more debt than you started with.

Not using your home equity loan tax deductions

Your home equity loan interest payments are tax deductible up to the first $100,000 borrowed for most purposes. If you use your home equity loan to buy another home or make repairs on your current home, you can deduct up to the first $1 million owed. Tax deductions can save you money.

All financial decisions require you to evaluate the impact that they will have on your financial future. This includes home equity loans. While the thought of cash in your pocket may sound like a good idea, there may be factors that cause this to become a poor financial decision. Carefully considering all of your options can help you to make the right choice.

Understanding the basics of home equity loans

In a home equity loan, you borrow against the equity, or the percentage of your home, that you own. While the cash may be helpful, it is essential that you understand that, by taking out a home equity loan, you decrease the amount of your equity.

The equity of your home is determined by subtracting the amount you owe from the value of your home. Most home equity lenders will not loan based on 100% of your home’s value. Instead, it is based upon 75%-80% of your home’s total value. This is done to protect lenders from economic changes that can depreciate the value of your home.

Like all types of credit, there is interest that must be paid on your home equity loan. The type of interest you must pay is determined by the lender that you choose and the options that they have available. The amount of your interest is determined by your credit and where you obtain your loan from.

Home equity loans are available in two types; second mortgage and home equity line of credit. A second mortgage will provide you with a lump sum while a home equity line of credit will allow you to tap into your home’s equity in small increments. Some home equity lines of credit have minimum amounts that you should be aware of.

Evaluating the reason for your loan

The single, most effective way of determining whether a home equity loan is right for you is to consider the reason that you want the loan in the first place. By considering your reasoning, you can determine if you have other options that are more favorable. Considering the reason can also force you to take a look at your credit and debt status.

Student loans or tuition

Using a home equity loan for a student loan or tuition can often be more cost effective than applying for a student loan. Because your home equity loan is secured, you are often able to obtain more favorable interest rates. However, if you or your child is able to qualify for grants or government loans, you may want to exhaust these options first. Grants are government money that does not have to be paid back. Government loans often have grace periods that allow you to defer payment until six months after graduation. They also have much lower rates than other types of loans.

Using a home equity loan for educational purposes can also double your tax deductions. Your home equity loan is tax deductible on the interest you pay up to the first $100,000. Student loans are also tax deductible.

Home repairs or renovations

Home repairs and renovations are another common use for home equity loans. Some home repairs are necessary to avoid future problems of the home, like roofs and plumbing. Others create energy efficiency like windows and insulation. Still other home repairs simply increase the home’s value, like adding a pool or patio.

Using a home equity loan to perform repairs on your home is almost always a good financial decision. Exceptions include not being able to handle the repayment of the loan or if you are planning to sell your home within the next couple of years. If you cannot handle the payments, you could lose your home, making the repairs in vain. If you plan on selling your home within the next couple of years, you could face hefty prepayment penalties for paying off the home equity loan early.

Debt consolidation

If you plan to use your home equity loan for debt consolidation, it is essential that you take a serious look at your credit and your debt situation. While a home equity loan may seem like an effective means of consolidating your debt, it also puts you in a situation that you are more likely to incur more debt. This can create a viscous cycle, leaving your family’s net worth depreciated and place you in a desperate situation.

For some cases, debt consolidation may be reasonable. Maybe you were in an accident and incurred a number of hospital bills and lost time off of work. If these bills were placed on a credit card, you could experience substantially higher fees than you would by paying these bills with your home equity. Again, it is important to consider why you need debt consolidation and how you can prevent the problem from occurring again.

Home equity loans can often be a good financial choice. However, not taking the time to consider your financial situation could leave your family in financial turmoil. By carefully considering your purpose for the money, you can prevent this from happening.