A fixed-rate home equity loan is a loan against the value of your home. It is sometimes called a "second mortgage." Equity is the difference between the current market value of your home and what you still owe on it. A loan is given for a certain amount of that net worth. This is called the loan-to-value ratio (LTV). The amount that has been approved is paid out all at once. Most of the time, you can choose to pay off your loan over up to thirty years. The amount you have to pay each month, including interest, is set.
Most lenders set a minimum and maximum amount for how much can be approved. The interest rate is fixed, but it goes up the longer the term of the loan. You must decide how long you need the loan based on how much money you can pay back. Most of the time, you can deduct the interest you paid on your taxes. You can do whatever you want with the money you get from the loan. It is smart to use the money to pay off loans with high interest rates, like credit cards. If you use the money to make improvements to your home, your equity goes up.
Before applying for the loan, it's a good idea to think about what the money will be used for. Get a few quotes from different lenders and look at the terms and conditions of each one. Watch out for loan sharks and costs you don't see. Also, keep in mind that interest is not the only cost of a loan. There's a good chance that there will be charges at the end. Some lenders may also charge extra fees. It is common for there to be a fee for paying off the loan early. Home equity loans may be easier to get for people with bad credit.
There are some risks. If you don't pay your bills on time, you could lose your house. If the house is sold before the loan is paid off, you won't get as much money.
Before you sign, make sure you have all of your questions answered. Talk to someone who knows about money. Or, you could get free help from groups that the U.S. Department of Housing and Urban Development has approved (HUD).
