What is a Home Equity Loan?
Home ownership definitely does have its advantages and one of the ways that many homeowners use their home is to borrow against the equity that has accumulated. Home equity loans are very affordable and a great way to borrow large sums of money.
It should be noted that equity is defined as the appraised value of a home, less the amount of money owned on it. Home equity loans can be valuable financial tools for some home owners, because a home equity loan allows a home owner to take out a loan, using their homes equity as collateral. Collateral is a term that means that you as the person taking out a loan pledge something of value (in this case your home) as a guarantee to the bank that you will repay the loan fully. The main risk with a home equity loan is that when you place your home as collateral, if you are unable to repay the loan, the bank can sell your home to recoup its losses
There are two main types of home equity loans; they come as either a home equity loan or line of credit. A home equity loan is a one time payment from the bank to you. Home equity line of credit, sometimes referred to as a Heloc is similar to a credit card, where you can borrow money on a regular basis, using your home as collateral, instead of it being unsecured as a normal credit cared. Both home equity loans and lines of credit are usually referred to as a second mortgage, mainly due to the fact that your home is your main collateral.
Both home equity loans and lines of credit usually allow the home owner to borrow much more than an average credit card, making it very attractive to home owners that would like to build an addition onto their home, send a child to college or open up a small business. Because home equity loans use your home as collateral, the bank sees it as a very secure loan and is willing to lend money to homeowners with very attractive rates, sometimes only a few interest points above a normal mortgage rate. It should be noted that since large amounts of money are usually being lent by the homeowner, home equity loans and lines of credit, usually have repayment terms of 5, 10, 15, and 30 years. However, 15 years or less is usually the normal repayment period.
