Finance — 3 months ago

What Is A Home Equity Loan?

by Roni G.

Home Equity Loan, What Is A Home Equity Loan

Home Equity Loan: What Is A Home Equity Loan?

Using your home or property as collateral to obtain a loan is considered a home equity loan option. The lender uses an evaluator to determine the value of the property and based on that will the lending authority provide an agreed amount to the borrower. Let us look at the merits and a few demerits of applying for a home equity loan.

Secured Equity Loan
A home equity loan is a secured loan as compared to the unsecured variety. In this context, the borrower provides the lender (as stipulated above) with a surety ‘bond’ enabling her/him to obtain the money that s/he has applied for, which is a part of the process.

Reasons to Get an Equity Loan
Most people use their homes as equity when repairs are needed for the house, college fees, medical expenses, a remodel of the house, starting a business, and other heavy payment needs. Given the fact that repairs and maintenance can cost a good penny, applying for a loan takes precedence.

Home Equity Loan

Types of Home Equity Loans
There are two types of equity loans – the closed type and the open-end type. A borrower can apply for a cash advance upfront in a lump sum. Over time, the amount has to be paid in fixed payment patterns. The interest levels are based on when the borrowings are made. As the payments are repaid, so will the interests. This is referred to as an amortizing loan.

History of Equity Loans
The credit history of an individual is looked into with a fine tooth comb by the lending authority. If you have a good credit score, your loan will be sanctioned at the earliest. However, if your credit ratings are in the dock, you may not be suitable for a loan. But, if you have improved your earning potential with a steady income and have been changing the repayment pattern of earlier loans, you may be entitled to a loan, but a smaller figure.


One can be approved for a home equity line of credit (HELOC) for a large amount. If you are borrowing a fraction of the amount, you will be entitled to multiple borrowings based on the approved amount by the lender.  Again, here, the loan will be based on your ability to repay all the borrowings. To get in the green, make amortizing payments regularly on a smaller scale - it will reduce the burden.

The HELOC is a very convenient option as it is extremely flexible. Who doesn’t want flexible when it comes to repayment of loans anyway! The only hassle - while it is convenient, chances of the lender freezing or canceling the line of credit can happen. Since the rates of the home equity lines of credit are variable, the rate of interest differs which could be iffy.

What Is A Home Equity Loan

Equity Loan Fees
Obtaining a loan is not a cut and dry process; there are fees that are chargeable to the borrower. Appraiser fees, title fees, annual fees, subscription fees, and so on and so forth. A borrower must consider the repayment plans based on the type of loan applied for, where the agreed amount must be paid for, or the property will go to the lender.

The repayment period lasts for ten years or more based on the agreement. This ensures that your property is not confiscated when you do not make consistent payments, which is a demerit of a home equity loan. If you fail to repay the amount at the agreed time, the bank can foreclose on the property. It will be sold to recover any unpaid debts made by the borrower.

Using your property as collateral to secure a loan is advantageous as long as you pay back the amount borrowed. One must factor in the most important of clauses, if the payment and interest do not occur in time, one will lose one’s property. Before zeroing on the first lender, check out alternatives.

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