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Home Equity Loans Explained 
Dwight@RateSupermarket.caStaff writer 
 Jason Zuckerman, a mortgage agent with Multi-Prets
 
 ,provides insight into thehome equity loan process.
Generally, the largest debt a homeowner will ever face is their mortgage.With proper budgeting, a steady income, and fiscal responsibility, making each andevery mortgage payment on time and in full is definitely doable.But life certainly isn’t so easy, and there are always plenty of other debt in people’slives, including student and car loans, home renovations and repairs, and the dreadedcredit card debt, which often carries an interest rate of 15% to 20%. When yourdollars are already stretched to their limits, it can be difficult to even pay the interest on these various debts each month.But, as a homeowner, you’re in a unique lending position, because you can – withproper approvals – borrow against the equity of your home, by taking out a homeequity loan.A home equity loan is based on the value of your home compared to what balance youowe on the mortgage. Being approved for a home equity loan is not as difficult as youmay think, because the loan amount is based on the value of your home. That meanslenders (usually banks) are comfortable adding to your current mortgage becausethey are safeguarded by the fact that if, for some reason, you default on yourmortgage, it can recoup its losses through the seizure and sale of your home.“In this economic crisis, people take (home equity loans) because they are looking forequity any way they can to pay off existing debts,” said Jason Zuckerman, a mortgageagent with Multi-Prets.The primary bonus of a home equity loan is its debt consolidation capabilities. Insteadof paying regular mortgage payments at a low interest rate – say 5% over five years,which is about the norm right now – and being saddled with enormous credit carddebt at the aforementioned 15% to 20% interest, a home equity loan will allow you totackle your most pressing debt – in this case the credit cards – and clear them off yourbooks. The amount you receive will be added to your re-negotiated mortgage termand rate, while actually lowering your monthly payments.
Before Debt Consolidation
 
Existing Mortgage
Property Value $170000Mortgage Balance $130000Interest Rate 8.20%Term 5 year
Monthly Payments
Credit Cards ($8000) $250.00Other Debt ($3000) $150.00Mortgage $1021.43Total Payments $1421.43
 After Debt ConsolidationNew mortgage
Property Value $170000Mortgage Balance $141000Interest Rate 5.75%Term 5 year
New Monthly Payments
Credit Cards ($0) $0.00Debt ($0) $0.00One Mortgage Payment $898.81Total Savings $522.52You can see how eliminating the secondary debt in this example will save this person$522.52 each month, by taking out an $11,000 home equity loan.Mr. Zuckerman said eliminating outstanding debts is important to long-term financialhealth, even if it means a larger mortgage down the road.
 
“The important factor in these transactions is that the clients’ debts are paid off and toincrease their credit score so that they can acquire a first mortgage at a mainstreamfinancial institution,” he said.How do you obtain a home equity loan?The best way of going about getting a home equity loan is through a mortgage broker.“Since I deal with a lot of clients who have poor credit or past bankruptcy, these tendto be the only option available,” Mr. Zuckerman said.“Within a few hours I can give the client a good idea whether or not they will beapproved for a home equity loan. It is important to work swiftly with these clientssince time is a factor. Each day is another day that their debt accumulates as a result of high interest rates.“A full financial audit is not necessary. Once I have taken an application and find out some basic information, I check the clients’ credit and calculate whether or not thedeal can work. At this time, I speak to my lenders and give them the specifics about the deal and sell it to them. Lenders generally require the same documentation, whichI collect on their behalf. Within 24 to 48 hours I should have an approval and a notarydate,” Mr. Zuckerman said.
 Advantages of home equity loans
•
 
You get cash in your hands to do with what you see fit – buy a new car, renovateyour house, clear up other outstanding debts
•
 
Tend to be the only option available to poor credit or a past bankruptcy
•
 
Chances are good your monthly payments will actually go down, because you’remost likely using your home equity loan to consolidate your debts into one mortgagepayment, eliminating the high interest credit card debts
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Since they’re tied to your biggest asset – your home – home equity loans can bespread out over the lifespan of your mortgage, which is often up to 25 years
•
 
Tax deductions are also available. If you put the proceeds towards an investment and make a return on that investment, you can deduct the interest paid on your Lineof Credit or Home Equity Loan against this return (but be sure to consult a taxspecialist for advice on this).
•
 
Can often be completed with 48 hours
Disadvantages of home equity loans
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You are risking your home by taking a second mortgage. If you can’t pay the loanback, a home equity loan can be catastrophic. Make sure that your intended use of funds is worth the risk you’re taking
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