What Home Equity Loans Guide

By: Daniel Roshard

Your home can help you raise cash. How? Home equity loans have become a popular way of raising cash. The amount that you owe for your house subtracted from its current appraised worth is the equity on your house. Or simply put, it is the difference between the appraised value of the house and the amount you owe on the mortgage. As you pay off your mortgage or as the worth of your home increases, you build your home equity.

Your home's equity can be used as a collateral to loan money. It can serve as a guarantee so that if you are unable to pay your debt, the lender can sell your collateral as a payment for your debt.

The home equity loan will serve as a second mortgage that will allow you to turn it into money which you can use to improve your home, for college education or whatever expenses that you are in need of.

There are two kinds, the home equity loan or the lines of credit. These types of debts are repaid in shorter time spans than first mortgages. If normally, a first mortgage may be repaid in 30 years, a second mortgage may be repaid in as short as 5 years to as long as another 30 years, averaging at 15 years.

Lines of credit is more flexible than the home equity loan because you can stay in debt with home equity loans. Interests are only being paid while the principal amount remains the same. The interest rate, therefore, varies as the principal varies.

These two types of debts have become common since the 1980s when values of properties increased tremendously and homeowners have taken advantage of this to pay off personal debts. Low interest rates and that fact that it could be deducted from your taxes are some of the reasons why they have become very attractive.

Though second mortgages have interest rates higher than first mortgages, it has lower rates than credit cards or other personal loans.

Homeowners usually opt for home equity loans when they are in need of a large amount of cash like debt consolidation or paying off hospital bills or even home improvement projects. Also, repayment terms are quite simple and consistent throughout the entire payment period, regardless of inflation rates.

Having discussed the plus points and pitfalls of home equity loaning and lines of credit, it is now possible for you to decide whether these types of cash conversion will work for you. You can now opt for the type of loan that would fit your very needs.

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