Raising Capital

Home-equity Loan

Need cash for your business? Own a house or other real estate? Have you got any equity? For many people who need cash fast whether for their businesses or personal reasons (that trip to Tahiti sounds pretty nice!) a home-equity loan is the best thing since sliced bread. Not only can you quickly raise a substantial amount of money, but your expenses and interest also may be tax deductible.

A home-equity loan is a loan from a financial institution such as a bank or savings and loan against the equity that you've established in your home. Say, for example, that you bought a home ten years ago for $75,000 and that you still owe $65,000 on it. Furthermore, assume that today that same home has appreciated in value and is now worth $125,000. The equity in your home is the difference between what your home is worth and the amount of money that you owe on it:

$125,000 - $65,000 = $60,000

So, as you can see in the example above, the home has built up $60,000 in equity during the ten years that you've owned it. Equity is great, but there's one problem with it: You can't get to it unless you sell your home. No ATM is built into the wall of your garage (at least not ours!) where you can withdraw your equity $40 or $60 or $100 at a time whenever you feel like doing so. That's where the home-equity loan comes in.

A home-equity loan is exactly that: a loan against the equity that you've built up in your home. How much money can you get? The answer to that question depends on a variety of factors, including:

The amount of your first mortgage: Different lending programs with different lending terms and conditions are available for loans of less than $100,000, for example, and for loans of $100,000 and more.

Your credit history: The better your credit history, the more money most lenders are willing to lend to you. As the quality of your credit history declines, so too does the amount of money you'll be able to raise from a home-equity loan.

Loan term: The number of years of the term of your loan five, ten, 15, 20, or whatever also have an impact on the amount of money that you'll be able to raise. The longer the term of your loan, the smaller each monthly payment is. This may qualify you for a higher loan amount.

Loan-to-value (LTV) requirements: Your lender usually is willing to loan an amount of money that equals only a certain percentage of the total value of your home when you combine the values of your first mortgage and your home-equity loan. If, for example, the total value of your home is $125,000, and your loan has an 80 percent loan-to-value requirement, that means the total of what you owe on your first mortgage and your home-equity loan cannot exceed $100,000 (80 percent of $125,000). So, if you still owe $65,000 on your home, you'd be qualified for a home-equity loan (assuming good credit history and sufficient income) of up to $35,000.

Obtaining a home-equity loan can be a fairly quick proposition. Some online lenders offer approval in mere seconds, but it's always better to anticipate your needs and give yourself several weeks to shop for the best deal, undergo the application and approval processes, and get that check in the mail. When you apply for a home-equity loan, you'll probably have the opportunity to decide whether you want your money all in one check or in the form of a line of credit against which you can write checks up to your credit ceiling. What's nice about the latter option is that you pay interest only on the money that you've taken against your line of credit.

Finally, don't forget that when you sign up for a home-equity loan, you're using your home as collateral in the event that you default in making loan payments. In other words, you can lose your home if you don't make payments on your home-equity loan. Be sure to keep this in mind before signing on the dotted line!