Home Equity Loan
In its simplest definition, home equity loan
means using your house equity as collateral in order to borrow money.
Collateral means your house will act as a guarantee. In the case if you
cannot pay the loan or defaulted too long on payment, the lender has the
right to sell the house to get back the loan.
The word equity simply means how much the house is worth minus the
mortgage you currently owe.
There are two types of equity loan
1) Home Equity Loan
A home equity loan is a one off lump sum of money when you take up a
loan. Usually, the loan period is between 5 to 30 years and the interest
rates are fixed. The payment amount per month is fixed as well.
2) Home Equity Line Of Credit
A home equity line of credit allows you to borrow a fixed amount of
money for the life of the loan. You do not need to take a lump sum loan
at once since you can withdraw any amount of the loan when you need it.
In a sense, it works like a credit card.
The interest rate for a home equity line of credit is variable and will
rise and fall during the loan period. Payment per month depends on the
total sum loaned, the interest rate and whether your credit is in the
payment or draw period. During equity draw period, you can decide
whether to pay the principal loan amount or the minimum payments to
cover the interest.
For equity line of credit, the loan period is usually shorter than home
equity loan. Usually, it is between 5 to 15 years. During this loan
period, you will not be able to increase the loan or repay the balance
left in the loan. Do note, there is usually a minimum amount whether you
decide to withdraw some money from the loan.
As you see, an equity loan line of credit has greater flexibility
compared to home equity loan. However in both cases, if you decide to
sell the house before the loan is fully paid, you are required to pay
the balance immediately.
The best way to obtain a low rate loan is to go
for a secured loan. A secured loan is given against a property. The
rates of interest on secured loans are much lower than the rates on
unsecured loans. If you are a homeowner, you can put up your house as a
security to get a secured loan. Such a loan is known as a homeowner's
loan. If your house is already mortgaged, you can apply for a home
equity loan. For instance, if your unpaid mortgage balance is, say 80%
of the value of your house, you can apply for a home equity loan on the
remaining 20% of the value of your house. This value, which is not
covered by the mortgage amount, is known as home equity.
A home equity loan can be used for any purpose. Since it is a low rate
secured loan, it can be very useful in consolidating your debt. The
basic purpose of a debt consolidation loan is to replace your high rate
loans into a single low rate loan. Therefore, a home equity loan is
ideal for debt consolidation.
A home equity loan can be used as a business loan. Because of a high
rate of failure of new businesses, lenders are reluctant to offer
business loans. Since a home equity loan is a secured loan, it reduces
the risk for lenders and they easily offer such a loan for business
purpose. Home equity loans are also a convenient way of obtaining bad
credit loans. If you have a poor credit score, a home equity loan can
help you avoid a high rate of interest.
A home equity line of credit is a type of home equity loan. In case of a
home equity line of credit, the borrower is allowed to borrow money
against his house up to a certain limit. The borrower does not have to
pay interest on the entire amount. He has the freedom to use a part of
the entire loan amount and pay the interest on only that much amount
which he has used.
The best way to obtain a low rate loan is to go
for a secured loan. A secured loan is given against a property. The
rates of interest on secured loans are much lower than the rates on
unsecured loans. If you are a homeowner, you can put up your house as a
security to get a secured loan. Such a loan is known as a homeowner's
loan. If your house is already mortgaged, you can apply for a home
equity loan. For instance, if your unpaid mortgage balance is, say 80%
of the value of your house, you can apply for a home equity loan on the
remaining 20% of the value of your house. This value, which is not
covered by the mortgage amount, is known as home equity.
A home equity loan can be used for any purpose. Since it is a low rate
secured loan, it can be very useful in consolidating your debt. The
basic purpose of a debt consolidation loan is to replace your high rate
loans into a single low rate loan. Therefore, a home equity loan is
ideal for debt consolidation.
A home equity loan can be used as a business loan. Because of a high
rate of failure of new businesses, lenders are reluctant to offer
business loans. Since a home equity loan is a secured loan, it reduces
the risk for lenders and they easily offer such a loan for business
purpose. Home equity loans are also a convenient way of obtaining bad
credit loans. If you have a poor credit score, a home equity loan can
help you avoid a high rate of interest.
A home equity line of credit is a type of home equity loan. In case of a
home equity line of credit, the borrower is allowed to borrow money
against his house up to a certain limit. The borrower does not have to
pay interest on the entire amount. He has the freedom to use a part of
the entire loan amount and pay the interest on only that much amount
which he has used.