How a Home Equity Loan Works

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How Does a Home Equity Loan Work?

How a Home Equity Loan Works

Before attempting to figure out your home equity loan amount, you must first determine what your equity level is. You need to determine your home's fair market value (FMV) through an appraisal. After you learn what your home is worth, subtract the balance of your first mortgage. The difference is your current equity value. The maximum you can borrow will be a per cent of your home's FMV, depending on which lender you select.

For instance, if your home is worth $300,000, your first mortgage balance is $170,000, and your lender will loan up to 80% of the FMV (minus your first mortgage balance), you could borrow as much as $70,000. {$300,000 x 80% = $240,000 - $170,000 = $70,000}

A credit report, income verification, title examination, mortgage deed and note will be prepared. At the closing of the loan, you will be given a document called the “right of rescission”, which gives you three days to cancel the loan. You must sign and deliver this document to your lender by midnight of the third day after closing if you choose to cancel the loan. If you do nothing, you will receive the entire proceeds of your home equity loan ($70,000 in our example) on the fourth day after closing. You may spend these proceeds however you see fit. You will repay the loan according to a pre-calculated repayment amount, if a fixed rate loan, or a schedule of payments that are constant until the first rate adjustment date.

   

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