Home Equity Loan

A home equity loan is a type of loan in which the borrower uses the equity in his home as collateral. These loans are sometimes useful for families to help finance major home repairs, medical bills or college educations.

The borrower receives a lump sum at the time of the closing and cannot borrow further. It is possible to borrow up to 100% of the assessed value of the home, less any liens. These fixed rate loans can be amortized up to 15 years with a 3, 5, or 7-year balloon payment. When the balloon balance is due, the borrower can pay off the balance or refinance.

This is a revolving credit loan where the borrower can choose when and how often to borrow against the equity in the property. Like the closed end loan, it may be possible to borrow up to 100% of the value of your home, less any liens. These lines of credit are available up to 30 years at a competitive variable interest rate. The minimum monthly payment can be as low as only the interest that is due.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually for a shorter term than first mortgages. Some people are able to deduct home equity loan interest on their personal income taxes.

When faced with a significant expense, such as medical costs, a new addition to your house, or a child's college education, you may find that you don't have the necessary cash on hand. In such a situation, you may want to consider a home equity loan or line of credit.

By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax law -- depending on your specific situation -- you may be allowed to deduct the interest because the debt is secured by your home.

Before deciding whether to head down this road, you should carefully weigh the costs against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And, remember, failure to repay could mean the loss of your home.

There are actually two variations on this home equity theme: lines of credit and loans. When comparing the two, however, keep in mind that you cannot simply compare the Annual Percentage Rate (APR) for a loan with the APR for a home equity line because the APRs are figured differently. The APR for a loan takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

Of course, there are plenty of other factors to keep in mind when considering either arrangement, as we discuss in other articles in this section.

Home Equity Loans