Deciding If A Home Equity Loan Is Right For You

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

Wells Fargo Financial does not offer traditional¹ home equity financing, but we do provide first mortgage loans which use the home's equity and we will work with you to help you find the right one. There's no obligation to find out how home equity financing from Wells Fargo Financial could change your financial picture. Inquire now about your assessment.

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

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Home Equity Loan Basics

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 has loan to value percentages available that extend beyond those of conventional or traditional mortgages.²

Four Home Equity Facts

Remember, there is some risk even though home equity financing 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.

1. Income – Make sure you have reliable, steady income so you can comfortably work the monthly payments into your budget.
   
   
2. 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.
   
   
3. 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.
   
   
4. Nearing Retirement – If home equity is part of your retirement nest egg, what are the consequences of tapping into it early?

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.³ 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.

Learn more about Home Equity financing. Check today's rates and find out how much you could qualify for.

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.

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 does not offer home equity financing, but we do provide loans which use the home's equity and we 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 free assessment.