Home Equity Loans

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If you need to finance major home repairs, medical bills or education then you may want to consider home equity loans (HEL), as a solution. Home equity loans allow you take out a line of credit, using the equity as collateral. Equity is the market value of the home minus the balance of the mortgage. Home equity loans should not be confused with home refinancing. Refinancing a home is paying off and replacing an existing loan. Home equity loans can be considered second mortgages.

Home equity loans are referred to as second mortgages because the loan is a lien against the property's value. The terms for these types of loans are typically shorter than the original mortgage. To obtain one of these loans, banks usually require you to have good to excellent credit history along with a reasonable loan to value ratio.

A home equity line of credit (HELOC) is another type of home equity loan. The difference between these is that a home equity loan is a secure closed-end loan where the entire amount is borrowed all at once. The payments are fixed and the amount is fixed as well. The amount borrowed can be taken out as needed. A HELOC is a revolving line of credit and the interest is prime plus a margin, where as the interest is fixed for home equity loans. A home equity line of credit also allows more flexibility in terms such as the interest.

One of the benefits of home equity loans is that it gives the homeowner quicker access to money, for projects and expenses should the need arise, at a reasonable interest rate. Another benefit is the interest is tax deductable. Interest rates are also typically less than other loan types such as personal and auto loans.

One thing to be wary of when getting a home equity loan is that you are using your home as collateral. If something should happen such as a job loss, and you fall behind on payments, your home could be foreclosed on. It also must be understood that you are turning over assets to a lender. Also, be prepared to incorporate fees into the cost of the loan. You may be required to pay appraisal fees, originator fees, title fees, stamp duties, arrangement fees and closing fees. Some creditors will have an early pay-off fee in the terms so be sure to read all the fine print before signing the loan.

In times where money is needed quickly, home equity loans are a viable solution, offering options in repayment, interest rates and loan terms. Be sure to read all terms and consult with a mortgage broker for advice before signing any paperwork.