Related Articles
Comments
- No Comments Found. Submit Comment
Home Equity Loan
What Is Equity?
Equity is the difference between the price for which a home could be sold and the total debts registered against it. Equity usually increases as the outstanding Principal of the Mortgage is reduced through regular payments. Market values and improvements to the property also affect equity.
A Home Equity Loan (or line of Credit) allows a home owner to borrow money by leveraging their equity, or the amount the home owner has invested into owning their home. A home equity loan is a second mortgage that lets you turn equity into cash, allowing you to spend it on home repairs, bill consolidation, and other major expenses. The Interest on a home equity loan is usually Tax-deductible when used for its primary purposes, unlike other forms of consumer credit such as auto loans or credit cards.
Home equity loans and home equity line of credit, also known as HELOC, are the two types of home equity debt. Sometimes they are referred to as second mortgages because they are secured by your property, just like the original mortgage. Repayment of home equity loans and lines of credit are usually in a shorter period than first mortgages. Most commonly, mortgages are set up to be repaid over 30 years. The repayment period of equity loans and lines of credit are often 15 years, although it might be as short as five and as long as 30 years.
A home equity loan is a lump sum given at one time that is paid off over a set amount of time, with a fixed Interest Rate and the same payments each month. Once given the money, you cannot borrow further from the loan.
A home equity line of credit, or HELOC, is more like a Credit Card because it has a revolving balance. The Lender sets a time limit for the life of the loan, in which you can borrow up to a certain amount. During that time, you can withdraw money as you need it. As you pay off the principal, you can use the credit again, like a credit card.
Advantages & Disadvantages
There are many advantages and disadvantages to both the home equity loan and line of credit. A HELOC gives you more flexibility than a fixed-Rate home equity loan. It also is possible to remain in debt with a home equity loan, paying only interest and not paying down principal. A line of credit has a variable interest rate that fluctuates over the life of the loan. Payments vary depending on the interest rate, the amount owed, and whether the credit line is in the draw period or the repayment period. During the equity line's draw period, you can borrow against it, and the minimum monthly payments cover only the interest, although you can elect to pay principal. During the repayment period, you can't add new debt and must repay the balance over the remaining life of the loan.
Don't forget, with either a home equity loan or a line of credit, you have to pay off the balance when you sell the house.Click Here To Find Out How A Home Equity Loan Could Eliminate Your Financial Problems.