What is a Home Equity Loan?

Home equity is a homeowner’s current interest in a home. It can grow over time should the property value increase or if the mortgage is paid down. The equity in a home is the difference between the home’s fair market value and the outstanding balance of all liens on the property.

Having equity in a home is a good thing, and for many homeowners, it is a valuable asset. Many people use this asset later in life as part of their retirement nest egg, but others tend to use it as a source of credit.

Home equity loans are appealing because you can access a large amount of money at reasonably low-interest rates and it’s easy to qualify when the loan is secured by real estate. Should you need to use the equity in your home, make sure, you do your homework and fully comprehend the possible benefits and risks. Below are the two different types of Home Equity Loans:

Home Equity Line of Credit (HELOC)

This loan allows you to take funds out as necessary, and pay interest only on what you borrow. Like a credit card, you can withdraw monies needed during the “draw period” and as long as your line of credit is open. During the draw period, you will need only to make low reasonable payments on your debt.

However, when the draw period ends, the loan goes into a repayment cycle which you will have to pay off at a higher rate or possibly make a large balloon payment at the end. HELOCs usually include a variable interest rate this could mean paying back much more in interest on the life of the loan than you had initially planned.

Home equity loan

It’s a lump-sum loan and usually has a fixed interest rate and a monthly payment that will never change. The length of this loan generally varies between 5 and fifteen years. Some lenders offer adjustable rate home equity loans but remember these rates fluctuate and when the interest rates go up your monthly payments will go up as well.

As you can see a home equity loan is not very difficult to comprehend and may be very beneficial to homeowners. The main issue with these loans is your home will serve as collateral and if you are unable to pay the lender can take your home away from you. That being said, make sure you weigh both the benefits and risk of this loan. If you do take out a home equity loan, make sure you have the means to pay it back.