A home equity loan is often referred to as a second mortgage and it allows homeowners to borrow money using the equity they have already built in their homes. With a home equity loan, homeowners can borrow up to $100,000. The interest on the loan is tax deductible, which brought home equity loans to popularity in the 1990s when the economy was not so good.
There are two types of home equity loans. One type is a fixed rate loan and one is a line of credit. Both loan types have terms ranging from five to fifteen years and both must also be paid in full if the house is ever sold.
A fixed rate home equity loan provides the borrower with a lump sum payment. It’s assumed that the borrower will pay the loan off over a set period of time with interest. The payments are usually paid monthly and remain the same amount over the entire life of the loan. The interest rate also remains the same over the life span of the loan.
A line of credit home equity loan works with a variable interest rate and uses the same principles as a credit card. It generally even comes with a credit card. Borrowers will be approved for a certain amount by the lenders. The borrower can then use this money by using the card or the special checks that the lender will provide. These payments will also be made monthly however the monthly payment will vary depending on what the current interest rate is and how much money was borrowed that month. When the term of the loan is up, any outstanding balances borrowed must be paid in full.
Home equity loans work well for homeowners who need a large amount of money fairly quickly. The homeowner may need the money for such things as paying off another loan, tuition money, home improvements, or other unexpected expenses. Home equity loans are a good option over other loans because the interest rate on them in generally quite low and is definitely lower than the interest on credit cards and other loans. Because of this, it makes good financial sense to pay off a credit card loan while using a home equity loan. It allows the homeowner to have one single monthly bill, a lower interest rate, and a loan that is partly tax deductible.
Home equity loans have many advantages for lenders as well. After the lender has collected on the original mortgage, they then are able to collect more payments and more interest. The lender is also entitled to keep all the money from the original mortgage and the home equity loan if the borrower defaults on payments. The lender is also allowed to repossess the home, sell it again and begin the cycle all over again with the next owner.
Home equity loans can be a very wise financial decision when homeowners are trying to lower their interest rates and pay off unforeseen expenses. Borrowers must carefully weight the advantages and disadvantages of taking out a home equity loan to see if it is the right choice for them.
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Loan Guru: Advantages of a Home Equity Loan
December 22nd, 20095 Advantages of A Home Equity Loan
December 15th, 2009Home equity loans are especially useful for homeowners that want to free up some of their capital tied up in the investment of their homes, and use it to their advantage. Here are the details.
These home refinance loans come in two main types, either of a one lump sum payment, or a line of equity credit that can be drawn on anytime.
Equity is up to 85% of the market value of your home, less what you already owe on it from your mortgage. For those who bought their homes some time ago and their homes have increased in value, this can be quite a considerable amount of money.
So let’s look at some of the advantages of having a home equity loan secured by your home:
1. Free Up Money – with a home equity loan, you can free up money that is tied up in your home, without having to sell it, giving you the opportunity to have things that you normally wouldn’t have the money to fund.
2. Flexibility – a home equity loan can be tailor-made to suit your personal needs, and budget. Some of the choices that you have include having ARM or fixed interest rates, lump sum equity paid to you, or a line of credit allowing you to use the money only when you need it, and pay interest only on what you have borrowed.
You can also negotiate the terms in years for your equity loan. This means that the longer that you take the loan out for, the less your repayments are.
3. Consolidate Debts – by having a home equity loan, you can consolidate all of your debts in the one loan, which means that you will be paying less on interest rates, and charges. Home equity for debt consolidation can also be used to lower monthly repayments on consolidated debt by taking the loan over a longer term.
Many people use home equity loans to consolidate consumer debts such as student loans, credit cards, store cards, and personal loans, which are unsecured credit that attract high interest rates.
4. Repair Credit – home refinance loans are also a great way to repair your credit. If you are unable to get credit because of a bad credit history, chances are, if you are able to afford the monthly repayments, you can still get the funds you need. This is because this kind of financing is secured by your home, making you, as a borrower, less of a risk to lending institutions.
Over time, you can repair your credit history by making regular repayments on time, which will increase the likelihood of being able to get more credit in the future.
5. Investments and Improvements
If you are looking for a way to improve the value of your home by doing some renovations, additions, or get deposit money to invest in other assets, an equity loan can be ideal.
Additionally, if you are planning to sell your home, but need to do some improvements prior to putting it on the market, an equity loan is also a wise choice.
As you can see, a home equity loan can enable you to do the things you want and need to do and make your life better. Look into this today.
By: Ken Black
