Homeowner Personal Loans

Owning a home opens up more borrowing avenues than just your mortgage. When you need funds, whether the need relates to your home or not, you can save money when you take advantage of available homeowner personal loans. These loans may not always be your best option, but knowing how each works can help you narrow your loan search.

Home Equity Loan

A popular option among homeowner personal loans is the home equity loan. This secured loan uses your home as collateral like a mortgage, but your lender files it as a second lien on the property. This means your equity lender gets behind the first mortgage for payment when it comes to a foreclosure.

To protect their investment, equity lenders use a formula to determine how much they can safely lend you. For instance, they may decide that the total of your loans cannot exceed 80 percent of the home’s value. If your home is worth $200,000, they cap your borrowing power at $160,000. When you owe $120,000 to your first mortgage lender, you have $40,000 in available equity to borrow. Sometimes, state law dictates the maximum loan to value, even though financial institutions may set their maximum well below the state’s limit to mitigate their risks.

Home Equity Line of Credit

A home equity line of credit is a more flexible version of the home equity loan. Homeowner personal loans in this form use the same calculations to determine available equity, but you do not receive a lump sum check after closing your loan. Instead, your available equity becomes your credit limit on a revolving credit account. You’re free to borrow from it and repay it as you see fit until loan maturity.

Equity credit lines typically allow you to draw from the line for a period of 10 years. At that time, your lender converts what you still owe into a fixed rate home equity loan, giving you 20 years to repay the full balance. In some cases, your lender will allow you to reapply for a new line of credit with a new maturity date.

The selection of personal homeowner loans available to you can vary based on the state you reside in and your credit history. Although these loans have potential to save you money at tax time, always check with a tax professional before writing off the interest. You should also consider the prevailing interest rates for unsecured loans. If your home equity loan rate is not below what you can get for unsecured credit, it may be time to try a different lender.