Tuesday, July 24, 2012

Home Equity Loans: How To Make The Most Of Your Equity

There is a myth that a mortgage simply drains income and traps homeowners into a long-term debt. But having a mortgage, and the home it was obviously used to buy, does not freeze your financial options. The commitment can lead to home equity loans to further enhance life and living.

Whether an applicant has a poor credit score or the perfect credit history, equity provides a highly valuable source of security when the need for large funds arrives. And because of the enthusiasm with which lenders greet equity as a form of collateral, the potential for securing loan approval on very large sums (say ,000 to 0,000) is actually extremely high.

However, criteria, conditions and limits also apply to these loans. Securing financing through home equity can have a positive impact but, as with all loans, must be repaid too. So, there are some issues that need to be understood before it is possible to make the most out of the opportunity.

What is Equity?

The first step to tapping into the full potential of a home equity loan is knowing what equity actually is. Equity is basically the share of the value of a property that is not accounted for by the mortgage, or any other loan.

For example, if a home is priced at 0,000, and a 10% down payment is made, then the required mortgage loan is 0,000. The equity on the home therefore, starts at ,000. This share of the home can then be used as collateral later on to help bad credit borrowers in securing loan approval.

And because the value of property is generally retained, financing through home equity is seen as the most reliable route to the funds that are needed.

Two Methods of Raising Equity

One of the biggest advantages of equity is that, unless there is a catastrophic occurrence in the property market, it continually grows. This means that regardless of the size of a home equity loan taken out, within a few years, more equity exists to help deal with any further problems.

There are two main ways in which equity grows. The most obvious is through the repayment of the mortgage loan. With each repayment made, a certain amount of the principal is bought back by the homeowner, thus increasing their equity on the home. So, the potential for securing loan approval returns every few years, once a large enough share of the mortgage is repaid.

The second way is through developments in the property market. For example, a home worth 0,000 in 2005, may be worth 0,000 today. So, the equity has increased over time, ensuring that financing through home equity is always possible.

Best Way to Find the Right Lender?

Of course, the terms and conditions that borrowers have to accept depend greatly on the lender that is chosen. While home equity loans are pretty straightforward to secure, there must be a proven ability to repay. Lenders generally charge low interest rates, so the repayments are always highly competitive.

But it is in the small print that the true value of a loan lies. Securing loan approval is half the battle, but if the right lender is found, the rest is made simple. Online lenders are easy to find, with comparison sites allowing fast analysis of the best offers available. It is a good idea to make a shortlist of four or five, then look more closely at what they have to offer.

Also, be sure to check their reputation with the Better Business Bureau before financing through home equity with them.

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