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Using Equity to Your Advantage

Mortgage Library: Home Equity Loans and Home Equity Lines; Using Equity to Your Advantage

Once you have purchased a home and are making monthly payments, you are in the process of building equity. The opportunity to use the equity you have built up in your home is one of the benefits of homeownership. A "cash-out refinancing" can be a good idea for homeowners who want to draw on the equity built up in their house to get cash for a major purchase or for their children's education. However cash out refinancing is more advantageous when the item that was purchased has a similar expected life as the loan. Making improvements to your property or purchasing a second home are examples. Since the interest on a mortgage is low, borrowing money against your home proves to be very sound. Besides the mortgage interest is usually tax deductible. (Check with your taxing authority!)

Typically you are allowed to refinance up to 75%, (sometimes 80%), of the value of the property on conforming loans whereas on jumbo loans you are limited to 70% of the property's value. For example, if your home is now valued at $120,000 and your loan balance is $70,000, you might be able to get a new $120,000 x 75% = 90,000 mortgage. That would allow you to repay the existing $70,000 balance and use the $20,000 for your financial needs.

Another possibility to use the equity to your advantage is Home Equity Loans, also called "second mortgage" loans, which are available up to 85% of the appraised value of your home. Home Equity Loans often carry a higher interest rate determined by your creditworthiness and loan to value ratios on the property. Draw periods can range from 5 to 25 years (typically 5, 10, or 15 years). The qualifying process for a Home Equity Loan is very similar to that of a first mortgage.

Some lenders now offer Home Equity Lines of credit that allow you to obtain cash advances with a credit card or to write checks up to a certain credit limit. Home Equity Lines also use the equity in your home as collateral for the amount of credit you request.

Related Articles:

Home Equity Loans and Home Equity Lines Their advantages and disadvantages.
Shopping For a Mortgage Information that will help you shop for a mortgage most effectively.

Government Publications:

Deducting Your Mortgage Interest Under the Tax Code (MBA) Tax benefits of owning a home.
Getting a Loan: Your Home as Security (FTC) When you use your home as collateral for a loan, Truth in Lending Act gives you the right of rescission -- the right to cancel the credit transaction within three business days. The brochure explains details.
Home Equity Credit Lines (FTC) Lenders are offering home equity credit lines in a variety of ways. Select the home equity credit line best tailored to your needs.
Second Mortgage Financing (FTC) This brochure provides answers to some common questions about shopping for a second mortgage or home equity loan.
Refinancing Your Home (FTC) The publication contains useful information to help you decide whether to refinance your home mortgage and how to go about doing it.
A Consumer's Guide to Mortgage  Refinancings (The Federal Reserve Board and the Office of Thrift Supervision) The information contained in this government publication is intended to help you ask the right questions when considering refinancing your loan.

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