Equity is recognized as the value that comes about when liabilities are deducted from assets. In real estate, equity is the difference between the fair market value and the amount owed on the property. Such figure is often referred to as real property value because it is the net amount that homeowners receive when the home is sold. Equity can be a good thing when understood and properly used. Here are a few things you should know about the incentive before seeking out a loan.
Home equity loans take on two forms: fixed rate and lines of credit. Whereas fixed rate advances are similar to personal loans, lines of credit resemble that of credit cards. Borrowers can withdraw money needed and continue to use funds available until the term of the loan ends. In general, fixed loans and lines of credit have terms from five to fifteen years and must be repaid in full if the home is sold.
Equity mortgages are quick sources of cash. They are great resources for emergencies and have lower interest rates than standard credit cards. In addition, interest paid on home equity loans are tax deductible.
It is easy to turn to home equity loans for any and all financial struggles. Many homeowners borrow against their property in hopes of alleviating problems with budgeting. Such practices can lead to bankruptcy and loss of property. Loans offered by subprime financial institutions also carry harsh prepayment penalties that assess more money when consumers pay off advances early.
Getting the most out of equity
Making an equity loan your last resort is the key to ensuring that you do not live beyond your means. You should always rearrange the budget in attempts to accommodate financial emergencies without borrowing against the value of your home. A loan should never be used to fix a long term problem. Perhaps you should consider selling your home altogether if you find that expenses are beyond your monthly income. It is important to remember that fixed rate loans are ideal for large purchases while lines of credit are great for recurring costs such as college tuition. In all instances, use equity wisely.
Photo: The Telegraph