Home Equity Loans
A home equity loan is a type of loan where a borrower uses the equity in their home as collateral to finance major expenses such as home repairs, medical bills or college education. Home equity loans come in two types: closed end and open end. Both are typically referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage.
Some of the benefits of home equity loans include the following:
- Home equity loans have low interest rates compared to traditional mortgages
- Home equity loans are often tax deductable
- Borrowers can secure relatively large loan amount
- Home equity loans are easier to qualify for if you have bad credit
There is a distinct difference between a home equity loan and a home equity line of credit (HELOC). A HELOC is a revolving line of credit with an adjustable interest rate. A home equity loan, on the other hand, is a one-time lump-sum loan, which comes with a fixed interest rate.
A home equity line of credit is similar to a credit card, which has a revolving balance that can be used to draw money over a period of time. Home equitylines of credit provide you more flexibility as you can continue to draw on the line during your draw period. Payments are typically lower as they are interest only.
With home equityloans, there is usually a premium associated for having thesecurityof a fixed rate. Although your rate and payments are higher you know what to expect each month because your payment is fixed and you are paying both principle and interest.
Many people use equity loans for larger expenses. Home equity loans are flexible and can be used for:
- Remodeling and renovating your current house, which increases the value
- Financing a second home
- Pay for a college education
- Consolidate debts with high interest