Home Equity

Features of a Home Equity Loan

A home equity loan is a form of loan in which an individual borrows against their home's value, or equity, effectively using it as collateral to secure the loan. Home equity loans are taken out for various reasons, including financing home repairs, paying major bills, paying school tuition, and much more. Most home equity loans require the borrower to have an excellent credit history and good loan-to-value ratio. This means that the value of the home should make it worth while for the lender to secure it with aloan.

A home equity loan is essentially considered a second mortgage because they are secured against the value of the property, just likea first mortgage. The terms for home equity loans vary widely between lenders, but they are generally shorter than a first mortgage. The terms, limits, and other rules vary between lenders; you will find those offering fixed interest rates and those offering varied interest rates. Other lenders will charge large fees up front, and some will charge closing fees. This is on of the main reasons it is worth your while to shop around and find out what options suit you best.

Home equity loans are classified into two categories: closed-end and open-end. A closed-end home equity loan is a secured loan is which the lender agrees to give the borrower one lump sum which must be paid back over the life of the loan, and can never again be borrowed against. After the transaction, the account is closed and the borrower pays it off.

An open-end home equity loan is a secured loan also known as a home equity line of credit. It is a form of revolving credit account where the lender sets an initial limit that and the borrower chooses how much and how often they use it up to that limit. The account remains open as long as the borrower chooses, and it can be used repeatedly, just like a regular line of credit.

Benefits of a Home Equity Loan

From possible tax deductions to major savings on interest, home equity loans offer many benefits to borrowers. Here are some of the ways in which home equity loans might affect your life positively:

  • Lower interest rates. This means that more of your money goes into your pocket and towards your principal balance.
  • Many loan options. There are numerous options for borrowers, so you are more likely to find a plan that suits you than not.
  • Possible tax deduction. Under the tax laws of the US, you may be able to write the loan off. Check the tax laws in your area and see if you qualify.
  • Allow you to make repairs on your home. If you have a home repair project you've wanted to implement for years, a home equity loan could be the way to finally get is done.
  • Free your finances for other debts or expenses.┬áThis means that you have more money for other financial matters, such as bills, other debt, or tuition.

To learn more, visit our Refinancing Tips and FAQ