Home equity loan is a loan a home owner can get from banks and other financial institutions with the equity on the house as collateral. Equity is the value that the homeowner has paid for on the mortgage loan taken to buy or construct the house. You should note that as the amount of the mortgage is reduced by the regular amortization or payments by the mortgagor or buyer, the equity increases. In the real estate world, the equity is the market value of the house minus the mortgage balance.
A home equity loan is also called a second mortgage. However, unlike the mortgage which is used to purchase the house, a home equity loan need not be used to add value to the house but could just be a means for the homeowner to have extra cash. So, the homeowner can use it for other purposes aside from house improvement. It should be put in mind though that like the mortgage, the house is still put up against this home equity loan.
There are two types of home equity loans:
1. Traditional or Fixed Rate Loan
The borrower receives a lump sum of the loan amount, which could not be changed once it is approved. Payment is made over a set period of time with a fixed interest rate.
2. Home Equity Line of Credit ( HELOC)
The bank or the lending institution approves a credit line for the borrower who may access the loan through lender-issued checks or credit card. The interest is usually less that that of a regular credit card. The borrower may take out less than the approved limit and the payment is based on the outstanding balance only, subject to some conditions like, the need for immediate take out ( after all you are supposed to need money) or to maintain a required outstanding balance. The borrower has to make use of the credit line or else the lender won’t make any money.
The offer for home equity loans is widely advertised. It’s not rare to get one or more mails offering this kind of loan. Is it a good idea to avail of a home equity loan? Is it to the advantage or disadvantage of the borrower? The collateral is such an important property; anyone intending to avail of a home equity loan should thoroughly study the advantages and disadvantages before making any final decision.
* The interest rate, which is less that that of a credit card, is tax deductible.
* Option to choose between the Fixed Rate loan and HELOC, according to the financial need.
* A chance for those with a bad credit record to get the much needed cash
* If the money is used for investments that earn more than the loan interest or to consolidate other debts with higher interest
* If the borrower does not completely understand the terms of the loan.
Any loan is supposed to tide the recipient over a financial need. Whether it is an advantage or disadvantage depends on how the borrower assesses his or her financial need against the risk of failing to pay and loss the house. Before taking out any home equity loan, the borrower should have a good understanding of the risks involved and a good payment plan.
* If the borrower has not used the money as originally intended and fails to have a fall back plan to pay the loan.
Author: This article is the property of LoanGuru.org and HomeEquityLoanStore.org – professional financial services with free quotes form multiple lenders: home equity loans, debt consolidation loans, mortgage refinance loans, and other types of loans for any individual’s financial needs.