Basics of Home Equity Loans

If this is the first time you are looking for a home equity loan and don't have any

experience in the mortgage market, you may feel overwhelmed because of the complicated terms and processes, and subtle nuances of these loans. But you will have to be prepared before your meeting with the lender to ensure that you get a good deal and understand all terms and conditions properly. This short guide will help you get acquainted to the basic concepts and terms related to equity loans.

What is equity?

Your equity is the part of the value of your home that belongs to you. You can calculate the equity in your house by deducting your outstanding debt on the property from the present market value of your house. For example, if the total value of a house is $100,000 and you have an outstanding debt of $75,000, your equity in your home is $25,000.

Home equity loan and HELOC

This loan is extended against your equity in your home. You can repay the borrowed amount in monthly payments. But if your financial condition is not good and you begin to miss your payments, the lender will be forced to foreclose the loan. When you pledge your house as collateral you allow the lender to sell it and reclaim his money.

All properties do not qualify for this loan. It is usually extended only against fixed residential properties. Single-family residences, condos and townhouses fall in this category. You cannot avail this loan against mobile homes or residential structures which are used for business.

You can avail this loan as a line of credit or as one time payment. The one time payment of home equity loan (HEL) that you receive should be repaid in monthly instalments within a fixed period, which can vary from 5 to 15 years.

If your needs are intermittent and unpredictable, you can go for a home equity line of credit or HELOC. You can continue to draw from your account until you reach the maximum limit that you are entitled to. The rate of interest on a HELOC varies with changes in the underlying benchmark rate.

Things to keep in mind

Make sure that you are not paying a lot of charges to avail the loan, as they will increase your overall funding costs. You should also pay special attention to prepayment penalties. If your situation improves and you want to clear this loan ahead of its term you should not have to pay a huge fine for that. Besides, you should also have a provision for converting the rate of interest from variable to fixed and vice versa.

Understand all the clauses in the agreement and know their implications. Before you choose a lender, conduct an extensive research about the deals that are available in the market. By taking a home equity loan, you are putting your home at risk. So make sure that your monthly payments are affordable and that there is no risk of default.

Basics of Home Equity Loans

By: Jeff Livingston

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