A home equity loan, sometimes called a second mortgage, is a type of loan where the lender requires the equity of the borrower’s house as collateral. For instance, your house is worth $400,000, and you have a mortgage on it, and you owe $200,000 on that mortgage. This implies that you have an equity of $200,000 in that property. The amount of the loan is determined by the value of the property in the market.
This, in turn, is determined by an assessment from the financial institution lending the money. Home equity loans are often used to pay for important expenses like the renovation of a house, medical bills, college education and so on. As you pay up your mortgage, you might want to use that equity or some of that value for other financial obligations by taking out a home equity loan against your property.
TYPES OF HOME EQUITY LOANS
There are two types of home equity loans, which are:
1. A set loan (closed-end home equity): This is a home equity loan where you can borrow a certain amount. For instance, you borrow $20,000 with interest, and you make payments each month. This is called the regular home equity loan.
2. Home equity line of credit (HELOC): Also called open-end home equity loan, this kind of loan occurs when money is accessible but interest would be required whenever you intend to use it. This type of home equity loan functions like a credit card; you are typically not paying interest, but once you make use of it, then there is a balance and a monthly payment that comes with it.
THE DIFFERENCE BETWEEN A HOME EQUITY LOAN AND A HOME EQUITY LINE OF CREDIT (HELOC)
The difference between a home equity loan and a home equity line of credit (HELOC) is the fact that a home equity loan features an amount given by the financial institution one time, with a fixed interest rate while a home equity line of credit functions like a credit card where funds can be collected from the financial institution at any time with an adjustable interest rate.
BENEFITS
There are so many benefits with home equity loans, but the five things you will surely benefit from are:
1. Unlike normal loans offered by financial institutions, home equity loans have reduced interest rates.
2. Home equity loans can offer a repayment period of 11 to 21 years to the borrower.
3. Home equity loans are flexible. Borrowers are allowed to borrow at any time. However, this benefit only occurs under the second category of home equity loan which is a home equity line of credit.
4. Home equity loans give the borrower a chance to borrow a large sum of money if the value of the house increases.
5. Home equity loans are stable because the interest rate does not change since the borrower is just collecting one lump sum.
