This home equity concept is not very complicated, but many average people are strapped with credit card debt, while not utilizing the equity in their home.
The equity in your home is calculated as the difference between how much your home is WORTH and how much debt is OWED against your home.
For instance, if you have a home that is worth $150,000, and you owe $120,000 on your mortgage, you essentially have approximately $30,000 of equity in your home.
If this is the case, you may be able to borrow additional money from a lending institution (depending on your credit history, income level, and various other factors), against the value of your home.
In today’s market, it is rare for a lending institution to allow you to borrow up to 100% of the value of your home, but oftentimes, they will allow you to borrow at an 85-90% loan to value.
That means, if a lending institution will allow you to borrow up to 90% of the value of your home, that the total of all the debts secured by your home cannot exceed 90% of your home’s worth, or value.
In the example above, using a 90% maximum loan to value calculation, the most you could borrow against your home would be $135,000. Since you already have a first mortgage of $120,000, that only leaves $15,000 for you to borrow in the form of an equity loan or line of credit.
Still, if you have up to $15,000 in credit card debt, in most cases it would make sense to pay this credit card debt off with a $15,000 home equity loan or line of credit.
Assuming that your credit card interest rates are significantly higher than the available home equity loan rates (which is normally the case), you will be saving a significant amount of money in interest charges over the life of the loan.
In addition, the interest on your equity loan or line of credit is tax deductible, if you itemize your deductions, whereas credit card interest is typically not tax deductible.
WARNING: Do NOT pay off your credit card debt with an equity loan or line of credit, and then go back out and run up your credit cards again. You’ve got to change some of your bad habits, if you hope to take control of your financial future.
What’s the difference between an Equity Loan and an Equity Line of Credit?
A Home Equity Loan is a loan for a specific dollar amount. Typically, you have a specific interest rate, a specific term (the length of time you have to pay back the loan), and a specific payment amount.
A Home Equity Line of Credit, or HELOC, is a line of credit available for you to borrow against, up to the maximum amount set by the bank or lending institution. Oftentimes, the monthly payment will be an interest only payment, and you can borrow and pay back the line of credit as you see fit, provided you do not exceed the maximum amount available.
Personally, I like the HELOC much more so than the LOAN, because it provides a lot more flexibility for the individual person. You are only charged interest on the amount you use, but it can also be a source of funds in case of emergency.
Furthermore, if you pay down a significant amount of the HELOC, and then realize you cut your cash flow a little too close, you can reborrow from the line of credit. This option is not typically available with a Home Equity Loan.
Finally, in the near future, when I write about the subjects of debt relief and mortgage relief, I will show you some ways that you can use a HELOC to significantly reduce the number of years it takes you to get completely out of debt, pay off your mortgage, and completely fund your retirement accounts. That information is coming soon...
To Your Success...