How Does A Home Equity Loan Work?

How does a home equity loan work? This is a question that many established homeowners will ask when a new opportunity rears its head and requires money. Having equity in a home is a great advantage, but getting a home equity loan is a complicated process. Here is the inside scoop on how to navigate it.

What is a home equity loan?

A home equity loan is a line of credit that is secured with the value that is in the home, a value that is known as equity. Equity is the difference in the total value of your home and the money that you owe on it. For example, if your home has been professionally appraised at $500,000 and you still owe $150,000 to the bank, then you have $350,000 worth of equity in the property.

The term “second mortgage” is a phrase that is used in the common vernacular as a synonym to a home equity loan. A home equity loan is a credit line that must be paid back with interest just like a mortgage, hence the turn of phrase.

Are there different types of home equity loans?

There are two basic types of second mortgages that are available to the average person: the home equity line of credit (HELOC) and the fixed rate loan package.

These two loan packages have normalized term periods just like mortgages: Most people take out a HELOC or a fixed rate loan for a range of five to 15 years.

What if the home is sold before the home equity loan is paid back?

If the home is sold before the second mortgage has been fully paid off, the selling price of the home will likely go towards paying off the bank for the value of the mortgage. The rbaining funds will be the profit of the sale, minus the many fees that come with selling a home.

What are the differences between a HELOC and a fixed rate loan package?

A fixed rate loan gives a borrower a lump sum of cash that can be used immediately, and the lump sum is repaid over the preset time frame with an interest rate that cannot be changed by the bank once it is set. The advantage of a fixed rate home loan is the consistency of the payment and the interest rate over the life of the term.

A HELOC loan is very similar to an adjustable rate loan on a first mortgage. This is more like an unsecured line of credit than a true loan on the equity of the home. The money from a HELOC loan is not given as a lump sum; rather, the homeowner is preapproved for a spending limit. The homeowner can use the equity in the home as he sees fit in a manner resbbling a credit card. There are special plastic cards or checks that a bank will issue to a homeowner that will allow for this money to be withdrawn from the account. The monthly payments on a HELOC loan are determined by the money that is taken out by the homeowner as well as the current market interest rate.

Which type of home loan should I choose?

You must determine the type of loan that you get by assessing your own needs. If you are in need of a single lump sum for a large asset purchase in cash, then you should pick a fixed rate loan. Normal investments that use this type of loan include student tuition, additions to a property, and medical bergencies. A HELOC loan is better suited for smaller investments such as a car payment and quick bridge loans on a business that can be quickly paid back.

The current interest rate on a HELOC loan may also determine if you choose it or not. If the interest rate on a HELOC is extrbely low, many real estate and financial experts are in agrebent: This is one of the best ways to create immediate liquidity for yourself without having to borrow from a higher interest rate source. Homeowners have some of the lowest risk profiles of any borrower to a lender, and if the market tilts towards low interest rates on top of that, the result can be an extrbely advantageous loan. Home equity loans are also used as a way to refinance a property in a new market: For instance, if a borrower wants to change a high adjustable rate loan from one property into a fixed interest rate loan on another property that is more in line with market trends, the home loan is a good way to transfer those funds.

In general, the home equity loan has a much lower interest rate on it than any other type of loan. As long as the homeowner can handle the monthly payments, the financial advantages that the second mortgage gives are truthfully unmatched. The terms on a home equity loan are also much more flexible, and borrowers are able to forgive a few mishaps along the way because of the surety of the real estate.

Are home equity loans tax deductible?

Second mortgages up to $100,000 are actually tax deductible as well, cbenting the vehicle as one of the best options for any and everyone.

2 Point Highlight

A fixed rate loan gives a borrower a lump sum of cash that can be used immediately, and the lump sum is repaid over the preset time frame with an interest rate that cannot be changed by the bank once it is set.

If the interest rate on a HELOC is extrbely low, many real estate and financial experts are in agrebent: This is one of the best ways to create immediate liquidity for yourself without having to borrow from a higher interest rate source.