Equity Loans

The Mechanisms of an Equity Loan

Equity loans are a very good way of financing yourself, maybe even if your income is low, although you have to be very careful if you know you are not in a good financial situation.

Theory

The theory behind an equity loan is to let people borrow money based on the value of their assets. The biggest asset of the average person is probably their home. Taking out a home equity loan is basically a way of refinancing yourself and a very good way of buying a house for your children for example. In this case the money is granted to you based on equity which means the amount of money that you get when you deduct the mortgage amount from the value of the house.

Usage

As I am preparing just now to do this I have quite a good understanding of how to go about this. If you own a house but want to buy another one for your child for example you may use equity loans. If you little ones are thinking of flying out, have a descent salary but don't have enough money to make a large downpayment you can enable them to pay just the monthly payment without a 20% starting price. How would a good plan go? Let's say you do not have a mortgage on your house which is worth exactly $200.000. What you then do is essentially sell your house to the bank while you also buy it back creating a mortgage like situation. This way you receive, say, $150.000 in hard cash which you are free to use. The parents can live happily in the house, while the children receive $100.000 for a new house. They can use $30.000 to furnish the house and put the remaining $20.000 in the bank to enable them to pay the monthly installments even if they get into a small financial pickle.

Closed End Loans

At the time of closing the borrower will receive a sum of money which is determined by many factors. Credit history and so on also count as well as the liens that will be deducted. It may be possible to borrow more than 100%of the worth, but this is rare and relies mostly on your credit history. Payments are made like in a mortgage situation, interest rate is usually fixed.

Open Ended Loans

Open ended equity loans are called revolving loans or home equity line of credit. The difference is that in open ended mechanisms the borrower can borrow multiple times against the value of his assets. The prerequisite is of course to pay the installments and other fees. These constructions typically have variable interest rates.

Dangers

Equity loans have increased danger if you are unable to pay. These are secure loans so if you are unable to pay your assets may be seized. Many scams have been based on this, with reduced amortization you will receive a very favorable installment amount but you will be shocked when at the end of a period you will have to pay a huge lump sum, this is called a balloon payment.