A home equity loan is simply borrowing on the difference of the value of your home and the outstanding mortgage on the house. Lets say, you have bought a home worth $50,000 some time back, after making a down payment of $5,000. The value of your home has now appreciated to $60,000. The difference between the present value of your home ($60,000) and the outstanding payment ($45,000) is $15,000. This is the amount of the home equity loan that you can apply for.
Home equity loans are normally called second mortgages, as they are normally for a lesser tenor than an existing first mortgage. However, one "caveat" that borrowers need to be very careful of is that in the event of default, the lender can foreclose on the house. Home equity loans have become hugely popular recently because of falling interest rates and tax deductions on interest repayments. Moreover, since a home equity loan has the house as collateral, the interest rates on such loans are normally lower than on other types of loans.
Due to the nature of a home equity loan, borrowers normally belong to the middle-aged bracket earning a decent income. As a result of this, the default rate among home equity loan borrowers is very low.
There are two broad types of home equity loans:
Fixed loans, which are very good for people who want some discipline in their repayment schedules. These are just like a normal term loan.
Line of credit, (HELOC) which offers more flexibility to the borrower in terms of repayment schedules and floating rate of interest.
So, still waiting to remodel your home or buy that set of wheels? Go for that home loan now!
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