Home equity loans are on the rise around Arizona golf communities, but exactly is a home equity loan and why are so many Valley residents out to get one?
Home Equity Loan vs. Line of Credit
Simply stated, a home equity loan or line of credit is a second mortgage. It allows a homeowner to borrow money using the property’s equity as collateral, or a guarantee for payment. Equity is the difference between how much the property is worth (at the time of application) and how much the homeowner owes on the mortgage(s). So if your home is worth $300,000 and you owe $100,000 on your mortgage, your equity is roughly $200,000. Though that may not be how much money a bank will allow you to borrow.
A home equity loan and a home equity line of credit (HELOC) are the two types of home equity debt that a homeowner can have. Because these debts use your property for security, they can be considered and are often referred to as a (second) mortgage. These debts usually have shorter terms than a mortgage though, typically ranging from five to 15 years.
A home equity loan is paid as a one-time lump sum and must be paid back over a set amount of time with a fixed interest payment and monthly payments. Once you receive the money, that’s all there is. A HELOC is like a credit card because you can borrow up to your limit, pay it off, then borrow again. The time limit will be set up by the lender and you can withdraw and pay off during this time. A HELOC is more flexible than a home equity loan, but it’s variable interest rate and payments could keep you in debt.
Home Equity Loans Rise for AZ Golf Homes
According to national data firm RealtyTrac, home equity loans are up 28% in Phoenix as compared to 2015. At one of the highest rates in the country, only Dallas and Birmingham have higher rates of this type of loan.
Part of the reason that home equity loans are on the rise is that they simple weren’t as possible or accessible after the housing bubble in 2008. And even in 2011 almost half of homeowners in the metro Phoenix area owed more on their mortgage than their property was actually valued at. Now in 2016, that estimate is much lower at only 12% who owe more than their home is worth.
Of course there is a lot that goes into a mortgage and home value, but the real estate market and local economy play a large role in the home’s value and thus the size of home equity loan you can be eligible for. Thus as you pay down your mortgage and property values continue to go up, you would likely be able to borrow more money against your home next year as opposed to last year.
But it’s important to look at the other side. If you borrow too much equity and the value of your home decreases or you can’t make your payments, remember that your home was collateral and that the loan is treated like a mortgage. So if you can’t pay your mortgage and you “drain” your home’s equity, that’s where foreclosure could come in. And what happened to many homeowners during the market crash.
Securing a HELOC or home equity loan could be a great solution to finding money for home repairs or improvements, medical bills, student debt or other expenses. But it’s always best to speak with a professional real estate agent and financial adviser before making a big move like this. With the Matheson Team, we will give you a fair assessment of your situation and keep your overall, long term best interests in mind. Contact us to find out the value of your AZ golf home, market conditions in your area, and if a home equity loan might work for you.
Don Matheson
Realtor | Founder
The Matheson Team – RE/MAX Fine Properties
21000 N. Pima Rd., #100, Scottsdale, AZ 85255
480-405-4228
[email protected]
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