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When confronted with financial needs such as home improvements and college tuition for yourself or your college age child, home equity loans may provide an answer. As the name implies these loans are based on equity that has been built up in an owner's home. When an individual purchases a home with a mortgage backed by a financial institution the loan agency sets up a payment schedule based on a set period, in many cases this period is 30 - 40 years. As payments are made against this loan, typically on a monthly basis, part of the payment goes toward the interest and the remainder is applied against the original amount of the loan or the principal.
When a borrower makes payments toward their mortgage a portion of these payments applies to the original amount of the loan, better known as the premium, while the remainder is applied to the interest. In the beginning of the loan the majority of the payment goes toward interest, while a small portion goes to the premium. As time goes on the percentage of interest is less and less and the premium is more. This payment toward premium is one of the factors banks look at when borrowers apply for home equity loans. While reduction on premium is one consideration when applying for home equity loans, the other is based on the market value of the home. A lending institution will examine the value of the home against the amount the home is currently financed for. This will help determine if the home owner qualifies for a home equity mortgage. In the case that the home has not been affected by a depressed market then the home's value should exceed the original purchase price of the home and therefore be higher than the amount owed. As long as the amount of the home's value is higher than the current amount owed on the home then there should be equity built up in the home and potential for home equity loans. When the home's value exceeds what is owed then the borrower may be in a good position to qualify for home equity loans. Since there will be available equity in the home. In a strong or normal housing market the value of homes will increase slightly year to year and therefore provide some form of security in a home owner's ability to secure home equity loan. Since this increase means that the home owner likely has managed to build some equity. In many cases the lender will consider the potential increased value of the home after improvements as the market value of the home and may be willing to lend money based on this increased value. When looking for a way to finance these extra costs it is a good idea to speak to a financial counselor to see if there is enough equity in the home to qualify for a home equity loan. Home equity loans may be just what is need to address those financial concerns such as college tuition and imporvements to a home. To inquiry about the elgiability requirements a borrower should contact their lender. |