Home equity loans allow homeowners to exchange the equity in their home for cash. The equity in the home which is the appraised value minus the remaining balance of the mortgage is used as collateral for the loan. Home equity loans typically have lower interest rates and the cash can be used for anything the homeowner wishes such as home improvements, upgrades, medical expenses, college tuition, vacations, or debt consolidation. A home equity loan is also known as a second mortgage, and another great feature of this loan is that the interest paid is tax deductible.
How Home Equity Loans Work
Home equity loans differ from traditional loans in that the loan acts as a line of credit in exchange for equity. There are two types of home equity loans which include fixed-rate loans and lines of credit. Both types have loan terms that are available from 5 to 15 years and the amount loaned is usually up to 85 percent of the equity in the home. One important stipulation is that the loan must be repaid in full if the home that was used as collateral is sold.
Fixed Rate Home Equity Loan
A fixed rate home equity loan provides the borrower with a lump sum payment which is to be repaid at an agreed upon interest rate and set period of time. The interest rate and payment continue to be the same amount for the lifetime of the loan.
Home Equity Line of Credit
A home equity line of credit is also known as (HELOC) which is a variable rate loan. This line of credit works like a credit card where the borrower is pre-approved for a set spending limit. This money can be taken out whenever the need arises. However, the monthly payments vary depending on the current interest rate and how much money was withdrawn. HELOCs also have a set term and must be repaid in full and the end of the term.
Benefits Home Equity Loans
Home equity loans provide many benefits to borrowers looking for financial help. Whether you are looking to remodel your home, consolidate debt, or pay for major life expenses, this loan product could be the answer you are looking for. Below are important benefits a home equity loan can bring you.
Lower interest rates
Home equity loans usually provide lower interest rates than credit cards. Because the equity in your home is used as collateral, there is a lower risk of you defaulting on the loan, thereby, allowing for lower interest rates.
Home equity loans may have the potential of being tax deductible, unlike credit cards. Consult with a tax professional to see if you qualify.
Lump sum payment
Home equity loans provide a lump-sum, cash payment. This money can be used immediately to pay for medical expenses, home repairs, vacation, or whatever the borrower decides. It also allows the borrower to consolidate debt under a lower, fixed interest rate as opposed to the higher interest rates of most credit cards.
For more information on a home equity loan, consult with our mortgage professionals today!