SECURED CREDIT CARDS AND MORE > home equity

Understand what home equity is and what you can do with it.

 A homeowner, after a few years of regular repayments of a mortgage, will have paid a substantial amount towards the principal loan amount obtained for the purchase of the home. At its present market value of say $ 250,000, if one is left with $120,000 towards the principal amount, then $ 130,000 is the home equity held by the owner. With the interest rates low, it makes sense to use the home equity to consolidate credit card debts, other high interest loans, finance children’s education, make improvements to home and the like. Financial institutions offer loans against home equity and usually this is called second mortgage. 

As opposed to raising a loan against home equity, one can opt for refinance mortgage.  What this means is that the original loan is fully paid off against the old mortgage and a new mortgage is arranged. With home equity loan, it means that there will be, in effect, two mortgages running at the same time. With refinancing, a homeowner can save substantial amount of money, sometimes thousands of dollars. But one should bear in mind that this involves closing costs, penalties and other expenses. If the original mortgage is just 4 or 5 years and if the present mortgage rates are very low, it makes sense to go in for a refinancing as the long terms savings in interests are going to be very substantial. In this case a home equity loan doesn’t make sense, as the equity built on repayments would be very low as the repayments have been made just over 4 or 5 years only.  

One can take advantage of the tax benefits of both home equity loan and refinance mortgage and thus save money on interest. Please consult a tax advisor on the benefits that one can get by way of home equity loans or refinance mortgages.

To understand various aspects of mortgage loans, home equity loans, credit cards, credit reports, car loans, personal loans and debt consolidation loans, we have provided links that give useful information, on this website. Click through these links and understand the terms and conditions before applying for any loans, credit reports or credit cards.