Home Equity Loans Explained

Home equity loans are used by individuals who already own their homes. These homeowners will want to take a vacation, make renovations on your home, pay off outstanding bills, and send a child to college or any number of other important reasons. They can borrow money on the value of their home.

What these homeowners do is to use the equity that is created in their home each time they pay down on their mortgage loan balance to get home equity loans or a home equity line of credit, which, in essence are both second mortgages.

When the homeowner pays down the home equity line of credit, more money becomes available to you. It is much like having a credit card. The homeowner can draw on the line of credit as needed and pay on it. There is usually a smaller amount of monthly payment due each month for the home equity line of credit. However, the home equity loans are given to the homeowner in a lump sum and a fixed mortgage interest rate is decided upon depending on the terms of the loan.

In all mortgage loan application processes, credit score is one of the key aspects of getting the best mortgage interest rates and home equity loans are no different.

The interest on both the home equity loans and the home equity line of credit are usually lower than credit card loans because they are secured against the home. Another important aspect of home equity loans and home equity lines of credit is that they are both tax deductible.

The difference between home equity loans and home equity lines of credit

Some people might be wondering which one of these loans is the best to have. Well, the home equity line of credit can be an ongoing source of available funds when you need it and home equity loans acts as a form of emergency fund. One thing you need to keep in mind, though, is that even though the money is readily available to you, your home is always at risk because that remains the collateral for as long as you have an outstanding balance.

To get qualified for home equity loans, you need to have proof of homeownership and proof that at least twenty percent of the value of your home have been already paid off. Your income and expenses are also a requirement. Your loan payment schedule will be a fixed monthly payment over a fixed period of time. You can choose to make the loan terms shorter or longer depending on how much monthly mortgage payment you can afford.

Here are some important things to remember:

1. Your mortgage interest rate may change when you take out a home equity loan
2. Each time you pay off on the balance of the home equity line of credit, it is made available to you again.
3. The equity in your home can help you to go on a vacation, fix up your home, pay off bills and send your child to school.