Home equity loans are quite simple to understand. It’s a loan that is secured by the equity that exists in your house or condominium. If you’ve ever heard the term “second mortgage,” you’re familiar with home equity loans.
Home equity loans can be a great way to tap into your equity and put that value to work for you. Whether you’d like to pay off your credit card bills, invest in a rental property, or take a trip, a home equity loan can help you achieve those objectives.
There are 2 types of home equity loans:
- Traditional. You receive a lump sum and make payments on the loan, just as you would on any other installment loan. The interest rate is usually fixed.
- The advantages are a predictable payment and interest rate. This is a great loan for debt consolidation or any big-ticket items.
- Home equity line of credit (HELOC). This is more similar to a credit card. You can use any amount you need, up to your credit limit. The interest rate is usually variable.
- A HELOC is great when flexibility is most important to you. You also only pay interest on the money you actually borrow. You can use the money whenever you need it.
Consider which type of loan is most supportive of your situation. Each type of loan can be a viable choice, depending on the circumstances.
Facts about home equity loans:
- There are differences from traditional mortgages. Home equity loans are much quicker to process than traditional mortgages. The fees are quite low, too. A traditional home equity loan can probably be secured for just a few hundred dollars. HELOCs are frequently free to acquire.
- Remember that the amount of equity in your home varies. Depending on what the market is doing, the value of your house is constantly in flux. When the value drops, the amount of equity in your home drops, too.
- A HELOC can actually be cancelled if your equity drops too much. This is one advantage of the traditional-style loan. Once you have the loan, any change in home equity is irrelevant, at least from the standpoint of acquiring the loan.
- Balloon payments can be part of the loan. Many home equity loans are set up to mimic the payments of a 30-year mortgage, even though the loan may only be for 10 years. This means that you’ll be forced to make a balloon payment at the end of that time. Be sure to include this fact in your decision-making process.
- Foreclosure is a risk. Remember that the loan is secured against the equity in your home. If you fail to make your payment, the lender can foreclose on your home to recoup the money that was lent.
- The interest rates are very good, but not as good as a first mortgage. Since the loan is well secured, lenders are able to offer good interest rates. But the loans are junior to the primary mortgage.
- If you stop making all of your payments, the primary lender will get their money back first. The home equity lender can only get its share from whatever is left over, which might not be enough. Remember that the amount of equity in your home varies.
If you need to borrow money, a home equity loan might be perfect for your needs. The interest rate is very good, and home equity loans can provide a lot of flexibility for any financial purpose. Shop around for the best rates and terms.