Do you need money for something important? Maybe you have a kid going college this fall, want to start a small business, or want to pay off a previous debt. There are limitless reasons why you might consider taking out a home equity loan. Whatever your reason, taking out a home equity loan in Colorado isn’t a decision you should take lightly.
For some people, it can help them save thousands of dollars in the long run. For others, there are better financial ideas than taking out a home equity loan or a home equity line of credit. In today’s article, I’ll explain exactly what home equity is and help you decide if you want to go down this path.
What is Home Equity?
Home equity is essentially the value of the homeowner’s financial stake in their home. It’s the amount of your home that you actually own. To figure out what you have in home equity, simply subtract any amount you still owe on your home from the property’s current market value.
What’s a Home Equity Loan?
A home equity loan (or term loan) allows you to take a loan amount based on your home’s equity plus other factors such as your income.
This loan is sometimes called a second mortgage. Upon the loan’s approval, you get a lump sum and must repay a certain amount each month. The loan is subject to a fixed interest rate, just like a first mortgage.
The length of the loan is usually shorter than first mortgages— it can be from five to fifteen years.
What’s A Home Equity Line of Credit (HELOC)?
With a “line of credit,” you are approved for a certain credit limit based on your home’s equity. This loan functions almost like a credit card in which you can withdraw money when you need it over the lifetime of the loan. You only pay interest on the amount you withdraw and not the total amount approved.
Credit lines have variable interest rates rather than fixed rates, so your repayments can change depending on the interest rate at the time you withdraw money.
If you’re considering a HELOC, you should carefully review all requirements, fees, penalties, and how often the interest rate is adjusted since HELOCs can vary depending on the lender.
Advantages of a Home Equity Loan in Colorado
- You have the freedom to use the funds for whatever your needs may be, unlike student and auto loans which are very specific.
- Interest rates are usually much lower than credit cards.
- Interest paid on your loan is tax deductible.
- Additional fees and closing costs for this loan can be rolled into the actual loan amount.
Disadvantages of This Type of Loan
- If you can’t repay the loan, you risk losing your home.
- You must pay back the loan in full if you move, so consider your future plans.
Other Important Factors
Get a realistic idea of your property situation. If you bought your home at a good time and it’s located in a strong market, then you should have substantial equity. Home equity is based on the CURRENT value of your home, so if the market is worse than when you bought your home, your equity might be lower than you hoped.
A lender will look at your complete financial picture. It’s not just your home’s equity that a lender will consider. They want to make sure you can repay the loan (and you don’t want to lose your home!). As part of the approval process, a lender will review your income, debts, and other financial obligations, as well as your credit history.
Ask yourself “why” you are taking out one of these loans. You should NOT use this loan for everyday expenses such as clothing, vacations, or gifts but rather for a particular project or need. Taking out a loan to access money for frivolous expenses is not wise. It’s a better investment if the loan will fund a home renovation to increase your home’s resale value.
Consult with several advisors. Every situation is unique, so get advice from several sources. As an experienced realtor in the area, I’d love to be one of the resources you use. However, I definitely shouldn’t be the only one you talk to. Before you make a big financial decision such as this, consult a professional financial adviser.
Please let me know if you have any questions about whether getting a home equity loan or line of credit is right for you. I can also help you estimate how much your home is worth and how much equity you’ll be able to use. Plus, I have great lenders who can help you through the process of obtaining a line of credit. Good luck!
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