Understanding the Home Equity Loan

Understanding the Home Equity Loan


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home equity loanIf you are a homeowner, you may have considerable equity in your home. Here are two kinds of home equity loan to learn about so you can determine if one is right for you.

What is a Home Equity Loan?

In the past, people called a home equity loan a second mortgage. It is simply a way for a homeowner to use the equity they have in their home. Equity is the difference between what the home is worth and what you owe on the home.

Types of Home Equity Loans

There are two main types of home equity loans. One is called a fixed0rate loan. This can be taken out for up to 15 years and has to be repaid when the home is sold. With this type of loan, you can get a lump-sum of money that you repay over a period of time. The monthly payment amount and interest rate remain the same over the life of the loan.

The other type of home equity loan is the Home Equity Line of Credit (HELOC). This loan works more like a credit card. With a HELOC, you will be approved for a specific spending limit. Then, you can remove money as you need it. Monthly payments and interest are determined by the amount you took out and the current interest rate.

Are Home Equity Loans a Good Idea?

For many people, a home equity loan makes a lot of sense.

  • This is money that is easy to access because your bank already knows the value of your home.
  • Interest rates are lower than credit cards or consumer loans.
  • Home equity loans up to $100,000 have tax deductible interest.

However, you do need to be sure that you use a home equity loan responsibly. You should never use it to buy something you won’t be able to afford. Going into deep debt with your home’s equity could cause you to lose your house.

Where Do You Get a Home Equity Loan?

The best place to start is with the lender that has your original mortgage. Although you can get a home equity loan through any bank, often your bank will give you better terms because they already know you and have worked with you before.

Nonetheless, do not just take their word that they have your back. Be sure to look at the interest rates and fees. If it isn’t a good deal, then look elsewhere. You’ll also want to look for things like:

  • Mandatory withdrawal amounts
  • Prepayment penalties

What Will The Lender Need From You?

Although this is similar in many ways to taking out a mortgage, the lender will need far less documentation than you needed for your initial loan. They will look at:

  • Your credit score
  • Value of your house
  • Current income

If you are considering a home equity loan, feel free to contact us. We’d love to share the names of some lenders we’ve worked with in the past.

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