Deciding If A Home Equity Loan Is Right For You

Home Equity Loans With Wells Fargo Financial

Home Equity Loan Options

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You've probably heard about home equity loans. You may even know someone who has one. If you're exploring loan opportunities, should you have one too?

You might need more information to help find the right choice for your situation. Let’s start from the beginning.

Home Equity Loan Basics

According to industry figures, homeowners have cashed out more than $500 billion in home equity between 2002 and 2007.

Secured loans are one type of available financing. A loan secured by property, a home for example, presents less risk to the lender. Less risk for the lender can result in higher loan amounts or lower rates for the borrower.

One common type of secured loan is a home equity loan.

Determining Home Equity

Home equity amount is found by subtracting current debt (mortgage balance plus other equity-related loans or liens) from the home's value.

Lenders determine the percentage of equity you can access with a simple formula called loan-to-value ratio (LTV).

Generally, the closer the loan value is to the home value (e.g. $100,000 home value and $95,000 home equity loan means 95 percent LTV), the higher the interest rate. Whereas, the farther away the loan value is from the home value (e.g. $100,000 home value and $80,000 home equity loan means 80 percent LTV), typically the lower the interest rate.

Some lenders offer flexible options allowing homeowners to borrow more than the value of their home.

In fact, Wells Fargo Financial offers home equity loans up to 110 percent of a home’s appraised value (not available in all states).¹

Four Home Equity Facts

Remember, there is some risk even though home equity loans can carry lower interest rates than unsecured credit. Defaulting on a home equity loan could mean losing your house.

That's why you should carefully explore your options and make sure a home equity loan is the right choice. Consider these elements before deciding.

Income - Make sure you have reliable, steady income so you can comfortably work the monthly payments into your budget.
Bill Consolidation - Rolling other credit accounts into a home equity loan may mean lower overall monthly payments. However, it could actually cost you more over time if you're taking much longer to pay off the debt.
Home Value - If your home's value drops, so does your equity. If you have borrowed against the equity and need to sell in a declining housing market, the sale price may not pay off your home equity loan. That means covering the rest on your own.
Nearing Retirement - If home equity is part of your retirement nest egg, what are the consequences of tapping into it early?

Home Equity Financing Options

The two most common types of home equity financing:

closed-end home equity loan
revolving home equity line of credit

Both types use the home as collateral, but there are some key differences.

Closed-End Home Equity Loan

borrower receives full loan amount at one time
repaid over a set period of time at an agreed-upon interest rate
payments, over time, reduce the total debt
interest typically paid on the entire loan amount
one-time closing fee

Home Equity Line of Credit

revolving line of credit accessed as needed
paying down the balance frees up funds for use
accessed with a credit card, debit card or checks
interest is only paid on the amount accessed

Because of their characteristics, you may consider using each product in different ways. For example, a closed-end home equity loan with cash out may be the right option to assist with a large, one-time expense. Whereas, a home equity credit line is designed for borrowing for large recurring expenses (e.g. home improvements).

Home Equity Loan Or Personal Loan?

There are many reasons you might choose a home equity loan instead of a personal loan. Typical personal loan products won’t offer the same benefits as a home equity loan. In fact, accessing your home’s equity may provide:

Larger Amount Of Credit. Equity that has accumulated in your home could be much higher than available credit from another source (i.e. credit card).
Lower Rates. You could pay less interest than you would on a credit card, for example, meaning you could have more money in your pocket for other expenses.
Tax Deductibility.² Generally, the interest on a home equity loan may be tax deductible.

Using Home Equity Positively

Experts don’t recommend tapping into your home equity for just anything, but there are some positive ways to use a home equity loan.

For example, home improvements, consolidating other higher-interest rate credit accounts, purchasing big-ticket items or clearing up large medical expenses...all common ways to use the equity in your home.

Home Improvements - Home equity loans are a popular way to pay for large additions or remodeling projects. Financial experts agree when considering home improvements, you should determine if the project adds value to your home resulting in more equity for you.

To learn about the value your project may add, you can:

find out selling prices of comparable properties in your neighborhood.
check with the National Association of The Remodeling Industry for information.
consult the annual Cost vs. Value Report conducted by Remodeling Online for estimated return on various projects.

Bill Consolidation - Combining several higher-interest rate credit accounts can be wise when it helps you restructure your debt, lowers your overall rates and/or provides a tax benefit. However, the key to success is committing to different spending habits.

Home Equity Don'ts

Some financial experts recommend NOT borrowing against the wealth you've accumulated in your home for these purposes:

Borrowing To Invest - A risky move and shouldn't be done unless you're sure the return on investment is there. Otherwise, you're putting your home on the line for an uncertain outcome.
For The Tax Deduction² - While the tax deduction is a nice benefit of a home equity loan, it's just that ... a benefit. Depending on your situation, you may deduct only a fraction of what you repay (e.g. $.30 of $1.00).
To Defer Debt - Combining other accounts for lower rates or to decrease overall monthly payments can be a good move. But, you need to be committed to different spending habits when you do this. Paying off outstanding debt and racking up more defeats the purpose.
To Make A Large Short-Term Purchase - Only a "don"t' when you wind up paying for something long after you've stopped using it. For example, using a 30-year home equity loan to finance a vehicle you only plan to keep for five years means you're paying for the vehicle long after you stop driving it and long after the vehicle has any value left.

Remember your home backs your loan. Make sure you ask questions before committing and you are comfortable with your monthly payment before making a final decision.

Wells Fargo Financial offers flexible home equity loan options and will work with you to find the right one. There's no obligation to find out how home equity financing from Wells Fargo Financial could change your financial picture. Contact us for your risk-free home equity assessment.

Apply today or call toll-free 1-800-945-8934.

When applying the percentage limitations, we consider the value of all encumbrances against the property. Not all home equity products are available in every state. You should consult your tax advisor regarding the tax deductibility of interest for home loans over 100% LTV.
Consult your tax advisor regarding the deductibility of interest.
All loans subject to credit approval.