Finance — 1 month ago

Home Equity Loan Explained

by Kelly B.

Home Equity Loan, What is a Home Equity Loan

What is a Home Equity Loan?

A home equity loan is a sort second mortgage that you take to help you pay for off the first mortgage. If you have built up enough equity over the years, you will be eligible for a home equity loan which allows you to borrow against your home's current value and provide access to a large amount of money. It's essentially using your home to guarantee a loan. Is it as good as it sounds? Well, yes. But it also comes with numerous risks.

How does a home equity loan work?

In a nutshell, with a home equity loan, you can take a large sum of cash up front, and repay the loan over a fixed period in monthly installments. There are different types of home equity loans, so you'll have to see which suits you best and go from there. The line of credit or HELOC means that you should get your loan approved for the maximum amount available and borrow only what you need.

Home Equity Loan
Although it may sound like a pretty good deal up front, there are drawbacks. It comes with the possibility of significant debt, you may lose your house if you don't end up paying back what you owe, and it usually comes with crippling fees that make you question your decision to apply for the loan in the first place. However, it's not all bad. There are also obvious benefits. You can get large amounts of cash; there is safety for lenders, low rates, and potential tax benefits.

What are your options?

There are two options you can use when you borrow money with a home equity loan. You can take a large amount of cash right up front and pay it back in a fixed period through monthly installments. This way, your interest rate will be set when you borrow the money. It won't be fluctuating as the months go by. You'll still have to adhere to the same interest rate that was initially set. Through each monthly payment, you're reducing the balance of your loan as well as covering some of the interest. This option of getting a home equity loan is known as amortizing the loan.

Home Equity Loan rates

The other options are to get approved for a home equity line of credit or HELOC for the maximum amount that's available to you. You can then just borrow what you need from that amount. This option lets you borrow money continuously, from the amount that was made available to you. You can make smaller payments during the earlier years with this loan. But you will soon need to start making full payments to pay off your loan.

The HELOC option is your most flexible one because you have complete control over how much you take from your allotted amount. This also gives you control over the interest rates. You’ll only need to pay interest on the amount of money that you use. That said, the flexibility does, however, come with a few risks. The lender can freeze your line of credit whenever he pleases. These freezes could happen rather unexpectedly. It could even happen when you need the money the most. As far as interest rates for the HELOC are concerned, your interest rates will vary according to the market, and that can be for better or for worse.

The home equity loan is one loan that’s attractive to both lenders as well as borrowers. If your home is worth more money than what you owe on it, your lenders can offer you funds for almost anything you want.

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