Home equity load or line of credit is a loan that uses the borrower’s equity in their home as collateral for the loan.
Home equity loans give homeowners the ability to borrow against their equity in their homes.
What is Equity?
Equity is the difference between market value of a home and the amount owed.
e.g.: If you still owe $200,000 on your mortgage and the market value of your home is $3,000, you have $100,000 in equity.
Equity is important with homeowners who have owned their homes for a long period of time, or if the market value is rising rapidly.
Home Equity Lenders
Home equity loans are granted by banks, mortgage brokers, credit unions, private lenders, and other real estate lenders. When any of these equity lenders grant a loan, they often secure them with a “second mortgage” on the property. This mortgage encumbers the title of the property until the loan is repaid. Interest rates on most equity loans are variable that fluctuate with economic conditions. This kind of interest is usually tax-deductible.
Types of Home Equity Loans
There are mainly 2 types of home equity loans:
- Conventional equity loan: This kind of loan enables borrower to receive the proceeds in a single, lump sum and pay interest on the entire principal from the beginning.
- Equity line of credit: This kind of loan enables the borrower to withdraw and repay money from an equity account and pay interest only on the money that he / she is using.
How to Get Home Equity Loan?
Home equity loan is generally quick to obtain and hassle-free if there is strong equity in the property and the borrower is reliable. This has both advantages and disadvantages. Because equity credit is easier to obtain than other home loans, borrowers, most often, are prone to take advantage of the ready cash. On the other hand, the equity in the home goes down and monthly payments go up.
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