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Home Equity Lines of Credit and Home Equity Loans

Home equity loans, quite popular as financial tools for acquiring additional sums of ready cash, are used for a variety of purposes, including but not limited to home renovations and repairs, college expenses, debt consolidation, expensive vacations, investment purposes, and unexpected medical costs. Additionally, home equity loans have become popular as a means to consolidate debt in an attempt to handle personal finances more effectively.

How is my home equity loan different than my mortgage?

Often referred to as second mortgages, home equity loans are very similar to first mortgages or home loans. Typically, the process of acquiring a home equity loan is simpler and less time consuming than acquiring a first home loan or mortgage. The borrower will need to show a reliable source of income, a good credit history, and a home with equity.

The main differences between a first mortgage and a second mortgage include lower closing costs and higher interest rates for the home equity loan. Furthermore, this loan will fall in place for repayment in case of foreclosure after any existing loans including first mortgages.

What kinds of home equity loans are there?

Fixed rate home equity loans have a specified interest rate for the entire life of the loan. The monthly payments will be identical each month. However, the amount of the payment that goes to the interest gradually decreases while the amount of the payment that goes to the principal gradually increases over the life of the loan.

An adjustable rate home equity loan has a set interest rate for a pre-determined time, after which the rate increases according to pre-determined guidelines. The monthly payment will also increase at this time.

With a home equity loan, the consumer borrows a specified sum of money for a predetermined number of years at a particular interest rate. Typically, home equity loans have terms of one, three, five, or ten years. Moreover, interest rates vary according to the term and the size of the loan.

What is a home equity line of credit?

A home equity line of credit, HELOC, allows the individual to borrow a specified sum of money that can be used in portions. This type of loan is popular due to its flexibility. The money is available if needed, and can be withdrawn from the account.

If it isn’t needed, it can sit at no additional cost to the borrower. Monthly payments vary depending on the actual amount of money that has been accessed. This type of loan is extremely useful for consumers who experience periodic expenses such as tuitions and medical expenses.

The primary residence or home is used as collateral for the home equity loan or equity line of credit. If the homeowner defaults on the loan, the home will be repossessed and sold to cover the debt.

Even if a consumer’s credit history is less than perfect, acquiring a home equity loan is still possible. Bad credit often prevents consumers from opening new credit card accounts. However, home equity loans and lines of credit are still available to them as long as they have a home with sufficient equity.

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