The definition of a Home Equity Loan


The difference between your home’s total value and the balance on your loan is equity. A popular way of getting lots of credit is to borrow money against your equity because of low interest rates. In addition, interest on most home equity loans is usually tax deductible so it becomes a great option if a buyer needs to make a large purchase. Home equity loans are generally used for consolidating debt, or used for major expenses like tuition, renovations or a large wedding. Your home is collateral for the loan so consumers need to be aware of how to use home equity loans properly. If a buyer defaults on the home equity loan the bank can foreclose the home.

The ‘home equity line of credit’ and the ‘second mortgage’ are the 2 types of home equity loans. A second mortgage is the traditional loan where the bank lends one sum of money that will be repaid over a certain amount of time. With a second mortgage the interest starts accumulating as soon as the bank gives you the money. A home equity line of credit is where the bank gives you a credit card or checks to make purchases; these purchases are then accrued against your home’s equity. Interest doesn’t begin building right away with a home equity line of credit, rather it starts accumulating after the first purchase is made.

The most popular way to repay a home equity loan is to make regular payments on the loan towards both the principal and the interest. Some loans give the option to pay the interest at the very beginning of the loan and pay the principal regularly in the future. Another option is to pay the principal and the interest at the same time, and make extra payments to pay a portion off sooner. This type of option depends on the lender as some loans issue penalties if you pay too soon.

When you’re finding a home equity loan it’s best to shop around and not necessarily go with the bank that has given you your mortgage. You can get different options like various interest rates, low starting rates, and even fixed interest rates. Some loans require on large starting fee, large payments due at the end of the loan, annual fees or closing costs.

A mortgage placed on real estate in exchange for cash (going to the borrower) is referred to as an home equity loan. For instance, a homeowner may get an equity loan for up to 80% of their home’s value. So if the home costs $200,000 the borrower can get up to $160,000 cash. This is only possible if the homeowner does not have a lien on the home. A lien, according to US law, is any type of charge against a property that creates debt or other obligations. Consensual liens include car loans, mortgages, security interest, chattel mortgages and property improvements. Non consensual liens include tax liens, and common law situations. Lenders often require that the borrower repay interest each month, which is calculated daily and compounded at the end of every month. If the borrower adds funds to the outstanding loan principal the interest will be reduced from then on. It is also possible to get an equity loan where the borrower can take out cash over and over, which in turn lengthens the life of the loan. Equity loans have much lower interest rates compared to unsecured or applied loans (ie. Credit cards).

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