Some people believe it’s not possible
to have home equity loans that equal 100 percent of
the value of your home. Not only is this possible, there
are some cases in which you may actually owe more than
your home’s market value. Take a look at some
facts about home equity loans with regard to the value
of your home.
You need to understand what’s meant by “100
percent of your home’s value.” The amount
of home equity you have is simply defined as the comparison
of the amount you owe against your home and the fair
market value. Here’s why that’s important.
If taking out home loans of any type, you are basically
pledging that you’ll make the payments and meet
the terms of the loan agreement. If you fail to do so,
the lender has the right to seize your property and
sell it on the open market in order to regain the money
you didn’t repay.
The amount of equity you have in your home is important
to a lender for one reason. If you default on a home
equity loan, the lender will seize the property and
set out to sell it in order to recover the amount of
the loan. If you owe only a small percentage –
50 percent or less – of the value of the home,
the lender can easily expect to recover his loss should
you fail to make the payments. But if your loan is 100
percent of what the house is likely to sell for, the
lender is going to be less likely to recover the entire
amount of the loan.
For this reason, some lenders limit the amount they’ll
loan on a piece of property to some percentage of the
value of that property – usually around 80 or
90 percent.
So what does this mean for you? If you’re looking
for a home equity loan that will take the amount you
owe on your home to 100 percent of the market value,
you may be offered less attractive terms. Remember that
the lender’s risk of non-recovery goes up when
your loan nears 100 percent of the market value.
In some cases, the fact that you’ve made timely
payments on your existing mortgage is a sign to lenders
that you’re a good risk. In that case, the fact
that you’re seeking a loan to 100 percent of your
home’s value may not be a negative point at all
and you may qualify for excellent rates.
By the same token, your home equity is an asset and
it’s sometimes a good idea (and necessary) to
put that to work for you. Take a minute to figure the
amount of home equity you have accrued, then decide
whether it’s time to take advantage of that asset. |
