A General Guide to Home Equity Loans

A home equity loan is a loan that is available to homeowners. In the most basic sense a loan is a sum of money that is borrowed by a person or company and then repaid, with interest (a percentage of the loan amount, usually calculated on an annual basis), over a set period of time. Two principal parties are involved in loan transactions: a borrower (the party borrowing the money) and a lender (the party lending the money).

The two basic types of loans are secured and unsecured. In obtaining a secured loan the borrower presents the lender with some piece of property (for example, an automobile), of which the lender can claim ownership in the event the borrower fails to repay the loan (also known as defaulting on a loan). This property is known as collateral. Unsecured loans, on the other hand, do not require the borrower to have collateral. A home equity loan is a form of secured loan, in that the borrower uses his or her house as collateral to secure the loan. People take out home equity loans for various purposes, such as undertaking home improvements or paying off debt (something-for example, money, a piece of property, or a service-that an individual owes to another individual or an entity).

In almost all cases a home equity loan will represent the second loan a borrower secures using his or her house as collateral. Because houses are very expensive, most homebuyers must first take out a loan to purchase a house. These home loans (commonly known as mortgages) are for large amounts of money and are repaid in monthly installments over a long period of time, typically 30 years. As time passes the value of the home will usually increase (a process known as appreciation), while the total of the mortgage that remains to be paid gradually decreases. The difference between the value of the house and the amount remaining on the mortgage is known as equity. Put another way equity represents the amount of money a homeowner is able to retain after he or she sells the home and pays off the remainder of the mortgage. For example, say a couple purchases a home for $200,000. They pay $20,000 up front (known as a down payment) and then take out a loan for the remaining $180,000. On the day they complete the purchase of the house (also known as the closing), the couple has $20,000 in equity (in other words the original down payment). Two years later their house is valued at $220,000, and the amount remaining on their mortgage is $176,000. In this scenario the couple would have $44,000 in equity on their home. With home equity loans the amount of money a homeowner can borrow depends on the amount of equity he or she has in the house. Traditionally this type of home loan is referred to as a second mortgage.

The two basic types of home equity loans are closed end and open end. A closed-end home equity loan involves a fixed amount of money; the borrower receives the entire amount of the loan (known as a lump sum) upon completing the loan agreement process (or closing). Closed-end home equity loans usually have fixed interest rates (in other words the interest rate remains the same for the life of the loan). Typically the amount of the loan will depend on the amount of equity the borrower has in his or her house; the loan amount might also depend to some degree on the borrower’s credit rating (in other words whether he or she has a proven record of paying off debts in a timely manner). In most cases a borrower is able to borrow up to 100 percent of the equity he or she has in a house. When economists talk about second mortgages they are typically referring to closed-end home equity loans.

With open-end home equity loans, on the other hand, the borrower does not take the lump sum of the loan amount all at once. Instead the borrower receives the loan as credit (that is, as a maximum amount of money he or she can borrow), which the borrower can use as desired. This type of home equity loan is commonly referred to as a home equity line of credit (HELOC). The borrower can take money out of a HELOC at any time and is only required to pay back the amount he or she actually uses. A HELOC is subject to what is known as a draw period, during which the borrower is entitled to borrow money, up to the total amount of the loan, whenever he or she wants. In this way open-end home equity loans give the borrower a greater amount of flexibility. Mos

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Home Equity Loan Comparison – An Overview of Home Equity Loans

an economy where housing prices are increasing and employment rates are stationary, the use of an equity loan is often the choice of homeowners who need extra funds. Such loans are sometimes known as second mortgages or even third mortgages and, if you have enough equity in your home, are relatively easy to get. Before choosing a lender, the homeowner considering such a loan should submit an application to several lenders and then do a home equity loan comparison to find the best deal. Today, with a struggling economy, this type of loan may be difficult to get, and the choices of terms may be limited.

What Does the Term “Equity” mean?

Home equity can be defined as the cash-in-pocket worth of the home. To calculate this amount, the estimated market price of the home less the amount of money still owed on the home is considered the equity. At the time of purchase, the equity technically is zero. If you make a down payment, that amount reduces the principal and gives you some ownership in the home. When you make your mortgage payment each month, a tiny portion of the payment is applied against the principal. As the amount owed decreases, the equity is increased by a like amount

As market prices of homes in the neighborhood increase, the value of your home is assumed to have increased as well. This is the second way in which home market values can be improved. If you were to sell the home at the improved price and pay off the existing mortgage, you would receive the difference, that is the equity, in the form of cash..

Your home’s equity will be increased if the value of your home improves because you have carried out home improvement projects to the building. Adding a room, upgrading the kitchen or bathroom or adding significant energy saving features typically increases the market value, and thus the assumed equity.

Home equity loan Proceeds Usage

An equity loan on your home makes sense for the borrower when there is need of significant cash at a low interest rate. Because the proceeds of the loan are secured by the home’s value, it typically costs much less than credit card debt. Sometimes the homeowner will pay off credit cards and other loans with a high interest rate by taking out a home loan.

Another common use for the proceeds of a second mortgage is the cost of college for you or for family members. An equity loan may be needed for catastrophic medical expenses not covered by insurance plans. Home owners sometimes obtain home equity loan funds in order to pay for major improvements or repairs on the home, especially those that increase its value.

What Borrowers and Lenders Look For in a Loan

Lenders want to know that you can repay the money that you borrow on your home’s equity. The amount of the loan, the length of the repayment period, your credit score and the interest rate all affect the amount of monthly repayment on the loan. The lender usually looks at the current market value and the amount of equity you have accrued before setting the amount they are prepared to make available in the form of a loan.

Sadly, for many, a bad credit home equity loan [http://www.fixedhomeequityloa

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