What information about home equity loans do I need?
Answer:HELs and HELOCs have become so popular that certain information about home equity loans will be helpful to help familiarize one with the subject.
What is a home equity loan?
In short, this a loan using your property as collateral. It is generally used as a second lien, but can be a first mortgage, or come as a third or fourth lien. In most cases, you will have a first mortgage and the difference between you first mortgage and your house value can be borrowed with a home equity loan.
Home Equity Loan Types
The traditional home equity loan (HEL) is a closed-end lump sum second lien installment loan. They usually carry fixed rate and payments for a term of 5 to 20 years.
The home equity line of credit (HELOC) is another very popular home equity loan. It carries adjustable rates, is in fact an open-end HEL - it has a draw period of 5 to 10 years and repayment period of 10 to 15 years. A HEL is like any revolving line of credit. If you have a $30,000 line of credit and use half of it, if you repay $5,000 you will be able to borrow $20,000 again.
Pros and Cons of a Home Equity Loan
Interest lower than credit card rates and tax deductibility are the greatest benefits from a home equity loan or line of credit. You could use a home equity loan to buy a house and interest will be tax deductible (within restrictions). However, failing to make payments on a HEL or HELOC may cause you to lose your home.
Final piece of advice: Monitor your credit report and score regularly, to ensure there are no inaccuracies or unauthorized activity. Your credit report and score are the two major methods that creditors and lenders use to make a credit decision about you. Higher scores usually mean lower interest rates, which will save you money.
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