In simple terminology, a home equity loan is a loan taken
against your house. A home equity loan is also called a mortgage or a second
mortgage. Another synonym for home equity loan is equity release schemes.
While taking a home equity loan you are actually borrowing
the worth of your house. If the house is completely owned by you, then the term
used for home equity loan is "mortgage", otherwise if your house is
not fully paid off but has equity, it is called a "second mortgage".
From now on we will use one term for both to facilitate better understanding.
We will call them Home Equity Loans.
A home equity loan is an extra loan that you take against
your home in addition to your mortgage; hence this is called a second mortgage.
This enables a home owner to encash equity without refinancing the first
mortgage. Most people are under the impression that the only way to raise cash
is by selling their homes. However reality differs and factually one can take a
second mortgage to free up the first mortgage also.
Equity is the difference between the amount you owe on your
current home mortgage and the current value of your home. Furthering this definition, suppose you sell
your home, the amount of cash left in your pocket after paying off the mortgage
is called Equity. This equity when taken as a loan from a lender, without
actually selling your home comes to be known as home equity loan.
Many lenders or loan companies allow you to borrow bigger
amounts calculated by subtracting the balances of outstanding mortgages from
125% of the market value of your home. However the actual equity is the
difference between appraised worth of your home and the balances of your
outstanding mortgages.
There is no bar on how you can use the home equity loan. You
can use it for any purposes as it suits you. A home equity loan is usually a
one-time fixed interest rate loan, which is paid out at one go.
The rates of interest or the cost of the loan will depend on
options you choose viz. the term of the loan and the amount; of course another
important factor has always been your credit rating. The longer the term of the
loan, the more you pay out as interest, also if the amount is more, the more
interest you pay.
As always with any liabilities one undertakes certain words of caution are advised. Check all your options thoroughly before making a decision. Choose the amount carefully and take only what you need and specify the term which you think would be comfortable for you to repay in. No point accumulating liabilities in exchange for spending on pleasures or acquiring unnecessary assets.
Home equity loans are easily accessible to people with poor
or bad credit rating since the lender is taking a lesser risk as the loan is
secured against their home.
A Home Equity Loan usually means that you get the best
interest rates on the loan, i.e. you get the loan at a lesser cost compared to
other loans because of assured security, but one should always remember that
the house is at risk lest you fail to repay the Home Equity Loan.
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