Home equity is the difference between mortgages and the current market value. It has a zero rate of return and is not liquid. In home equity loan the borrower utilizes the equity as collateral. These loans are essentially advantageous as they are able to provide individuals with larger finances. In a home equity loan a lien (security interest that is laid against an item of property) is created with the borrower’s house.
Home equity loans can be held by first, second and third positions deeds. But in order to get a good loan it is necessary to have a good credit history so as to enable an individual to get a good value loan.
Types of Home Equity loans
There are two types of equity loans:
- Closed end home equity loans
- Open end home equity loans
In closed end home equity loans an individual receives a large some of finance in just one loan. He/she is not entitled to get any further loans after this sum has been paid to the borrower. As the name suggest “Closed end” which means that the borrower doesn’t have a specified period of getting the loan, but just a particular time upon signing the agreement of the loan. The loan amount that an individual can get depends upon the credit history and the collateral of the person. These types of loans have a fix rate of amortization and have to be paid up in the period of fifteen years. Since the borrower has taken a large sum of loan he has to return the sum at the end of the period which is also called balloon payment.
In Open end home equity loan the borrower get a specified amount of the loan over a period of time. This specified period of time is called home equity line of credit (HELOC) as the time period for this loan is not specified. However the lender sets a specific credit line for the borrower based upon the equity in the property. Similar to closed ended equity loan the person can get 100% of the value paying it back after a specified period of time. The time period for this type of home equity loan is up to 30 years. The interest rate can vary depending on the suitability of the loan as the borrower can base the rate of interest on the prime rate or margin.
Advantages and disadvantages of home equity loans
Advantages of the home equity loans include:-
- Home equity loans enable a borrower to take a large sum of money which can help in debt consolidation
- The period of returning the loans is more flexible than other loan periods.
- The home equity loan enables leads to decrease accumulation of debts.
There is only one disadvantage regarding equity home loans, which is people are not able to maintain a good credit history which might lead to further accumulation of debts.
Therefore home equity loans are one of the easiest loans that borrowers can procure as it enables easy payments in terms of the rate of interest.
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