What Is Home Equity Loan?

In its simplest definition, home equity loan means usingThe interest rate for a home equity line of credit is
your house equity as collateral in order to borrowvariable and will rise and fall during the loan period.
money. Collateral means your house will act as aPayment per month depends on the total sum loaned,
guarantee. In the case if you cannot pay the loan orthe interest rate and whether your credit is in the
defaulted too long on payment, the lender has the rightpayment or draw period.
to sell the house to get back the loan.During equity draw period, you can decide whether to
The word equity simply means how much the house ispay the principal loan amount or the minimum
worth minus the mortgage you currently owe.payments to cover the interest.
There are two types of equity loanFor equity line of credit, the loan period is usually
1) Home Equity Loanshorter than home equity loan. Usually, it is between 5
A home equity loan is a one off lump sum of moneyto 15 years. During this loan period, you will not be able
when you take up a loan. Usually, the loan period isto increase the loan or repay the balance left in the
between 5 to 30 years and the interest rates areloan. Do note, there is usually a minimum amount
fixed. The payment amount per month is fixed as well.whether you decide to withdraw some money from
2) Home Equity Line Of Creditthe loan.
A home equity line of credit allows you to borrow aAs you see, an equity loan line of credit has greater
fixed amount of money for the life of the loan. You doflexibility compared to home equity loan. However in
not need to take a lump sum loan at once since youboth cases, if you decide to sell the house before the
can withdraw any amount of the loan when you needloan is fully paid, you are required to pay the balance
it. In a sense, it works like a credit card.immediately.