Many small business owners who are in need of financing do not realize the tremendous resources that are available at their fingertips. Those who own a home often have another type of loan available to them, the home equity loan or line of credit.
These loans eliminate some of the problems posed by collateral. If you own a home or part of a home, that ownership stake can be used as collateral instead. This has its pros and cons; it’s good because it is available to many more small business owners, but it could potentially become a problem if the borrower is unable to pay back the loan. In this case, the lending institution acquires an ownership stake in the home.
Home equity loans are generally available from banks in two forms-the traditional loan format and the revolving line of credit. The traditional bank loan form involves a lump sum, with interest payments made on the entire amount. The line of credit, on the other hand, essentially functions as a credit card does-your limit is tied to your home’s equity, and you only pay interest on the outstanding principal. Interest rates on both of these types of home equity loan are generally much lower than credit card interest rates.
The amount of money you can borrow with a home equity loan varies from bank-to-bank. However, most banks use a metric called the loan-to-value ratio. They measure the amount of debt you have against your home, and compare that to the value of the home. Banks feel comfortable loaning you money up to an 80% loan-to-value ratio. So, if you currently owe less than 80% of your home’s value, you can probably find a home equity loan to make up that remainder to finance your business.
By: Matthew Potter
Posts Tagged Lending Institution
The longer you live in your home the more equity you are building up in it. Home equity can be very important and can be a good buffer if an emergency comes along because you can obtain an equity loan depending on how much equity you have built up.
If you are in need of an equity loan what will happen is first of all the lending institution will send out an appraiser to set a value on your home and then based on this you may qualify for a percentage of that amount for your loan. This will be your loan ratio.
Quite often, you hear the term market value and what this refers to is the price that if someone wanted to buy your home what would they be willing to pay for it at this particular time. That does not necessarily mean that that is the sale price of your home now because it can vary.
Once you know these facts then it is a little easier to get a decision made about your home equity loan. It is a wise choice not to go and take out a loan against your equity unless you absolutely have to. You want to consider the future when it comes time to sell your home.
The more equity you have built up the more money you will end up with in your pocket after you have made your sale. As we mentioned though there are times that it just is not avoidable.
You need to shop around for your home equity loan the same as you did for your first mortgage. Again, there are variable rates and quite often for the home loans, you get a good rates because you have the collateral in your home.
Some of the reasons you might want to use your home equity is perhaps to pay off some debts that are at a high interest rate and by doing this at a lower interest rate than you are going to pay off the principal much faster.
Another reason for obtaining and utilizing your home equity by way of a loan is for home improvements. This is a potentially good investment because quite often most updates and remodeling can add value to your home. Another good use for home equity is to put the kids through school or even for starting a business. Whatever your reasons for choosing to use your home-equity make sure that they are good ones and think about your future as well.
By: Thomas B. Chuong