Home Equity Loans

There has been a run on home equity loans over the last several years as homeowners have sought to take advantage of the leap in home values and the low interest rates available. Those two factors made it possible for many people to turn a portion of their home equity into cash by taking out a second mortgage - a home equity loan.

These loans are usually for terms of five to fifteen years and almost always are offered with adjustable rates. The interest rate at maturity will probably be about two percent higher than your primary mortgage loan. Most lending institutions will allow home equity loans that increase your debt up to 80% of the home's value. If your first mortgage on that $400,000 home is $300,000 then you are eligible for a home equity loan of $20,000. That brings your indebtedness on the house to $320,000, which is 80% of the home's appraised value.

Home equity loans are subordinate to the primary mortgage on your property, which is one of the reasons why the interest rate is higher. Should financial disaster befall you and your family and send your home into default, the bank will foreclose on the house and sell it off. The lender that provided the first mortgage gets paid first - all principal owed on the loan as well as any interest still owed. The provider of the home equity loan will receive payment from any monies left after the primary lender has been paid.

The reasons for taking out a home equity loan can be numerous; for some it goes to pay college tuition for the kids; for some it pays for a home improvement project; some homeowners will invest the money in an expensive toy such as a boat or in a piece of land to begin a second home. But the number one reason cited by home equity borrowers is to consolidate existing debt.

Borrowing to pay off debt can be a dangerous thing, because accrual of the initial debt is often the result of uncontrolled spending. It is a mistake to put your house up for collateral to pay off high interest, near term debt unless your spending habits change. If they don't, before long you'll be faced with another stack of credit card bills that is about to become unmanageable. And if your credit card debt threatens your ability to pay on both mortgages, you risk foreclosure.