If you own a home, you've probably gotten a lot of offers for a home equity loan. Have no idea what this is? Don't worry, you're not the only homeowner who has had to stop and ask what a home equity loan is.
Over the last 20 years or so, these loans have become more common.
How to Know About a Home Equity Loan
There is value locked up in the house you own. With a home equity loan, you can get that money. Another way to look at it is that the equity in the homeowner's home is used as collateral. People who own their own homes often take out these loans to pay for things like home repairs or remodelling, unexpected medical bills, or even college.
The main thing that this type of loan does is put a lien on the home. Until the loan is paid off, the loan amount reduces the home's equity.
Don't think that every homeowner can get a home equity loan just because I say so. These loans are only given to people who have good credit and have been in good standing with their mortgage company for a long time. The home equity loan is basically a second mortgage because, like a first mortgage, it is backed by the value of the home.
Most first mortgages are for 30 years. But most home equity loans don't last as long.
There are two kinds of loans you can get based on the value of your home: open-ended home equity loans and closed-ended home equity loans. A line of credit is a type of home equity loan that has no set end date. With this type of loan, the borrower decides when and how they want to use the equity in their home to get money.
Most of the time, the borrower can get a loan for 100% of the home's value, and the interest rate can change over the course of up to 30 years.
In a closed-ended loan, the borrower gets a fixed amount of money, and that's the end of the transaction. The amount given is based on the value of the house, the borrower's income, and his or her credit history. Since the money is given all at once, the lender would rather have a fixed rate of interest.
As a home owner, it is your choice to take out a loan against the value of your home. Most of the time, homeowners can get a better interest rate on this type of loan than on a personal loan, which makes it a cheaper way to borrow money. Not all loans are free money. This much is clear. So make sure you look at all of your choices before picking one.
In the end, any kind of loan can be both good and bad. You can benefit from it or be hurt by it. Whether or not the loan was a good idea will depend on how smart and grown up you are.
