What information about home equity loans do I need?


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.

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