 |
Tags: finance, home equity loans, types of home equity loans
 If you are looking for credit or to borrow using your home then you need to understand the types of home equity loans to know which home equity loan is right for you. A home equity loan is a type of second mortgage, allowing you, a homeowner, to borrow money by using your house as collateral.
There are two types of home equity loan—the fixed rate one and the line of credit. They are both available with terms between 5 to 15 years and both need to be repaid in full when you sell your home. The first type is the fixed or standard home equity loan also known as a closed-end home equity loan.
advertisement
It provides a single, lump sum to the borrower and is repaid over a period of time with an agreed upon interest rate. Usually the payment and interest percentage stay the same for the prescribed term. The maximum amount that you can borrow is determined by factors such as credit history, income, and the value of your home.
You can borrow up to 100% of the appraised value of the home, less any liens and/or attachments. In some cases creditors will even allow you to borrow beyond the 100% value of the home. Interest is fixed and can be amortized for periods usually up to 15 years. While some creditors offer reduced amortization they usually require a balloon payment at the end of the term.
These large final payments can be avoided by paying above the minimum required or by refinancing. The second type of home equity loan is the variable home equity line of credit (HELOC) or open-end home equity loan. The total credit amount is not advanced up front, but rather through a line of credit wherein you can borrow sums that total no more than the credit limit, similar to a credit card.
You would be approved for a specific amount of credit usually by taking a percentage of the home's appraised value and subtracting from it the balance owed on the existing mortgage. The percentage can be dictated by state regulatory laws. The funds can be borrowed during the "draw period,” and is usually between 5 to 25 years.
You repay the amount drawn plus interest. The interest is based on an index such as the prime rate meaning that lenders can change the interest rate over time. Be aware that not all lenders calculate the margin—the difference between the prime rate and the interest rate the borrower will actually pay—the same way.
A HELOC may have a minimum monthly payment required. You may make a repayment of any amount so long as it is greater than the minimum payment. Full payment of the principal amount is due at the end of the draw period, either as a lump-sum balloon payment or according to the amortization schedule.
A home equity loan attracts borrowers because; 1) it has lower interest or APR; 2) it’s easier to qualify for even if you have bad credit; 3) payments may be tax deductible, and; 4) one can get a relatively large amount compared with other types of borrowing. If used to consolidate debts borrowers get one payment with a lower interest and tax benefits.
While a home equity loan can be a valuable tool for responsible borrowers it does have its pitfalls. A major pitfall is that it seems to be an easy solution for a borrower who may have fallen into the never ending cycle of spending, borrowing, spending and borrowing—going deeper into debt.
This is what’s called as reloading or the taking of another debt to pay off other debts and using the extra credit to add to what's already owed. Thoroughly review your financial situation before you borrow against your home to minimize the risks and find the proper plan for you.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
Share this article
You may reprint this article in its entirety on your web site, newsletter or ezine, providing you leave the About the author sections intact. You may not alter the contents.
|
|
