Home Equity Loans

Explained and teacher lesson plan

 

A Home Equity loan is a type of loan available to people who
own residential real estate, such as a single or multi-family
home, condominium or vacation property.

A home equity loan is based upon the value of the home (what
it will sell for) minus the amount of money that is owed on the
mortgage.

For example:

Home's value - amount owed = available equity

Mr. Dean, your next door neighbor decides that he would like
to build an addition on his home. The bank determined the
value of the home to be $250,000. Mr. Dean owes $175,000 on
the current mortgage. Since he has a good credit rating, he can
borrow $75,000 to complete the construction project.

$250,000 (value) - $175,000 (mortgage) = $75,000 (equity)

 

Interest rates

Current interest rates are running around 4.00%, depending
on your credit rating and funding source.

 

What can a home equity loan be used for?

A home equity loan can be used for almost anything
that the homeowner wishes. Instead of using credit or
available cash, people use their home equity to purchase
larger items or services such as:

• Home construction or remodeling projects
• College education
• New cars
• Debt consolidation
• Vacations

 

Advantages

 

People see many advantages to a home equity loan.

Lower Interest Rates. Interest rates for home
equity loans are about 50% lower than the standard
credit card interest rates. This encourages many people to
use home equity loans to consolidate their credit card debt.

 

Easy to obtain. Home equity loans are offered by every
major financial institution. As long as you own the property
and have a good credit rating (FICO Score 640 or higher),
you are generally eligible.

 

Tax Deductible Home equity loans may be tax deductible,
thus reducing the amount of taxes owed. Always check with
your tax advisor before using a home equity loan.

 

Disadvantages

 

In most cases, a person's home is the largest investment that
they will make in their lifetime. By taking out a home equity
loan to finance a new car, vacation or other item that does not
add value to a home, would be considered a risky financial move.

A home equity loan is taken out against your home, it is
considered a secured loan. Which means that if you do not
make the required payments, your home could be foreclosed
upon if you do not make the home equity loan payments on time.

It is recommended that if you believe that you could lose your
job or source of income, you would be better off not to tie
your car and credit card debts against your home.

 

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VI. Talking points for class discussion

 

• The value of a home is based upon the current real
  estate market. The price people are willing to pay for
  your home, determines its market value. Market
  value can change regularly.

• Secured debt is when a loan uses a house, car or other
  item of value as collateral.

• Not paying your debts on time can result in poor credit
  scores or the bank foreclosing or taking your house or
  car.

• Debt consolidation is when a person consolidates all of
  their bills (credit cards, loans, mortgages) into one monthly
  payment. This is done to save money on either interest
  rates or monthly payments.

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 Lesson plan on Home Equity Loans

 

Word Problems / Short Answer

 

1. Frank and Judy are planning to remodel their home.
The bank told them that the current value of their home is
$165,000. Their mortgage is currently at $55,000. How
much equity do they have in their home?

2. What is the difference between a secured loan and an
unsecured loan?

 

3. If you were to have a credit card that you carry a balance
on, would you rather have an interest rate of 4% or 7%? And
why?

 

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