What Are Home Equity Loans?

Home equity Loans . . . we hear this term frequently and many people have a general idea as to the meaning, but what exactly are these types of loans? Can they benefit home owners?

Equity Home Loan

A home equity loan (HEL) can be a godsend to a homeowner. For example, a person may buy a home and later experience financial set-backs--and, on top of that, face unanticipated and expensive home repairs that their insurance doesn't cover.They may simply not have the money up-front or in savings to cover the cost of the repairs. What to do?

This is where an equity loan comes into play. A homeowner can borrow against the equity in his home.The loan is secured against the value of the property. A equity home loan is often referred to as second mortgage.

A home equity loan is usually a one-time, lump-sum at a fixed interest rate and the loan can greatly help when times are tight. Borrowing against home equity has become a modern method to gain a big chunk of cash, especially with lower interest rates. Interest on home equity loans are tax deductible so, for the person who needs to cover a large expense, a home equity loan can be a life-saver.

People use an equity loan to consolidate debt or they use it for costly tuition or for home repairs.

Equity Home Loan--Important Considerations

Your home is collateral for the loan . . . what will happen if you default on the loan?

• A home equity loan places lien on a person's house.
• An equity loan reduces the home's actual equity because now more is owed.
• The home equity loan approval process may involve fees for surveyal or appraisal of the property. Most home equity loans involve fees of some sort.
  
• Because an equity home loan is what is considered a secure loans, if the borrower defaults on payment, the creditor takes possession of the asset, in this case the house.
• In some circumstances a homeowner may be liable for payment of the equity loan.
  

These loans are usually closed or open, depending on the type of loan. Interest starts building as soon as you receive your money.

Homeowners should do their homework about what type of equity home loan they are actually getting because, for example, a recourse loan would mean that in the event of foreclosure, the homeowner would still be liable to cover the debt owed.

Additionally, it is important to ascertain if the debt would be dischargeable in the event of bankruptcy. Some people make the mistake of using a home equity loan to pay off their credit card debt, believing this to be a good move because the interest amount for the home equity loan may be lower than the interest rate for their credit card and the payment amount may also be lower because of a longer repayment time-frame; however . . . they've now converted a dischargeable amount into one they would be responsible for in the event of bankruptcy.

If a homeowner decides to go the route of applying for an equity loan, a good credit history is a factor, and in most cases, there has to be reasonable value established in relation to the home.

Most people do not want to reduce the actual equity amount in their homes (they may plan on selling in future and count on using the proceeds to move up to a nicer/larger home) but depending on the circumstances, an equity home loan can protect a buyers' investment--so the benefits may outweigh higher loan amounts.

• A home equity loan is known as a second mortgage
• Equity loans offer a lower rate of interest than credit cards
• An equity home loan is one lump-sum amount, with a fixed rate of interest and fixed payments

People should always compare lenders and rates to get equity loans that are right for them. A home equity loan may be a viable route to ease financial burdens.