| Home equity loans have become one of the most | | | | they are secured by your home just like the first |
| popular fund raising options for individuals. | | | | mortgage. |
| Home equity loans are the loans taken using your | | | | "Second Mortgages" are repaid sooner than the first |
| home's equity as the collateral. Thus they are a type | | | | mortgages, which are usually repaid in thirty years. |
| of secured loan. | | | | Home equity loans usually have a time frame of five |
| These loans are based on two facts - first, that you | | | | to fifteen years. |
| have repaid a certain portion of the home mortgage | | | | Home equity loans are a one time lump sum loans, that |
| and thus should be able to reutilize that equity; and | | | | are repaid over a time period decided beforehand. |
| second that the value of your home has increased | | | | On the other hand, home equity line of credit or |
| since you first purchased it. | | | | HELOC allows you to borrow up to a certain limit for |
| The common reasons for taking an equity loan are | | | | the period of the loan. The time limit of the loan is set |
| home improvements, educational expenses, medical | | | | by the lender. You can withdraw money any time |
| bills, debt consolidation etc. There are usually no | | | | during the time period and repay it any time. It works |
| restrictions on how the borrowed money is used. | | | | the same way like a secured credit card. |
| The interest paid on such loans is usually tax | | | | A HELOC has a variable interest rate that varies |
| deductible. Also the interest rates on them are lower | | | | through out the period of the loan. The HELOC interest |
| than credit card other type of consumer loans. (They | | | | rate depends on the prime lending rate (prime lending |
| are higher than the first mortgage.) | | | | rates are fixed by the federal reserve in the US.) The |
| Let's understand what "home equity" is. | | | | payments can vary depending on what is the amount |
| Home equity is defined as the difference between the | | | | that has been borrowed, the interest rates and |
| market value of your home and how much you owe | | | | whether the loan is in the draw period or the |
| on the mortgage (or mortgages in case you have | | | | repayment period. |
| more than one.) | | | | The credit rating of the borrower is also a factor in |
| The market value of your home will be determined by | | | | deciding the home equity loan interest rates. |
| bank's appraiser or a licensed appraiser. | | | | The draw period of the line of credit is the period |
| Suppose market value of your home is $ 100,000 and | | | | during which you can borrow any amount up to the |
| you have made a down payment of $ 10,000. | | | | limit specified by the lender. Also only the interest has |
| Then your equity | | | | to be paid during this period; however you may choose |
| = market value - amount owed | | | | to repay the principal amount if you wish. |
| = $ 100,000 - $ 90,000 | | | | During the repayment period, no new debt can be |
| = $ 10,000 | | | | taken and the existing debt must be paid back. |
| After three years if you have paid back $15,000 more | | | | Usually draw periods are for ten years and repayment |
| of the debt, you will still have $75,000 of the debt left. | | | | periods around fifteen years, but this varies depending |
| However after three years the market value of your | | | | on the lender's policies. |
| home would have increased to $ 150,000. | | | | Withdrawals for HELOC can be done by checks, |
| Thus your equity after three years would be | | | | credit cards or EFT. Lenders may have certain terms |
| Market value - amount owed | | | | which make require you to take an initial advance |
| =$ 150,000 - $ 75,000 | | | | when the HELOC is setup, borrow a minimum amount |
| =$ 75,000 | | | | each time you use it and keep a minimum outstanding |
| Besides home equity loans (fixed rate home equity | | | | balance. |
| loans), there is another type of home equity debt - | | | | If you decide to sell off your home, you have to pay |
| home equity line of credit or HELOC. | | | | back full amount of the home equity loan. |
| Both of them are known as "Second Mortgages" as | | | | |