A Home Equity Loan is a type of secured loan in which the borrower uses the equity on his home property as collateral. Also known as second mortgage, Home Equity Loans create a lien against the debtor�s house, and decrease the actual home equity.
They are generally second position liens, however, they can also be held in first or third position. There are two types of Home Equity Loans. These are the Home Equity Loan per se and Home Equity Line of Credit.
Both Home Equity Loan and Home Equity Line of Credit are regarded as second mortgages because they are secured against the market value of the property. However, these loans have shorter terms than first mortgages.
The Home Equity Line of Credit or HELOC is a line of circulating credit with adjustable interest rates. In contrast, a Home Equity Loan is a one-time lump sum loan with a fixed interest rate, and is paid off over a set amount of time.
The amount of payments is the same each month until the loan is fully paid. However, the drawback of Home Equity Loans is that once you get the money, you are not allowed to borrow further from the loan.
In deciding on this type of loan, it is wise to familiarize yourself with the terms such as recourse and non-recourse loans, secured and unsecured loans, and dischargeable and non-dischargeable loans. Depending on the laws in your State, non-recourse loan is a secured loan with a real estate property as collateral, however the debtor is not personally liable.
A Home Equity Loan can be a recourse loan, but the debtor is personally liable. The distinction is important in case of foreclosure because the debtor may remain personally liable for a recourse loan on a foreclosed property.
Both Home Equity Loan and Home Equity Line of Credit have flexible terms of payment, which can be as short as five years and as long as 30 years. The most common term is 15 years. In Home Equity Line of Credit, the debtor can choose when and how often he will borrow against the equity of his home property, while the lender sets an initial limit to the credit line according to the criteria used for Home Equity Loans.
Moreover, in Home Equity Line of Credit, it is possible for the debtor to borrow 100% of the value of a home, minus any liens. The terms for this loan can be up to 30 years, and the interest rates are often variable. The minimum monthly amortization can be as low as only the interest due.
Home Equity Loans are popular among homeowners for several reasons. The interest rates are usually lower. People who have bad credit score can still avail of such loans at the same interest rates. Any payments you have made for Home Equity Loan may be tax deductible.
Chances for obtaining large amount of loan from home equity are higher, and the purpose of considering such loan is varied. There are people who may need additional funds to pay off college education. Others are relying on this loan for home repairs of payment of bills such as hospitalization.
