HOME EQUTIY LOANS: AN INTRODUCTION

HOME EQUTIY LOANS: AN INTRODUCTION

HOME EQUTIY LOANS: AN INTRODUCTION

A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity as collateral in their home. These loans are useful to finance major expenses such as higher education, home repairs and medical bills. There are different types of home equity loans with own unique characteristics and benefits; they are traditional second mortgage and line of credit.

Traditional second mortgage- in this loan situation you will receive a single lump sum of money which is paid back over a fixed period of time.

Line of credit- A home equity line of credit is a loan in which your lender provides you with a credit card or checkbook to use it whenever you decide to use it. No interest grows in addition until you actually make a purchase.

Home equity loans are secured loans and the debt is thus secured against the collateral in the event that the borrower defaults and the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower. Credit card debt is an unsecured debt such that no asset has been pledged as collateral for the loan so using a home equity loan to pay off credit card debt essentially converts an unsecured debt to a secured debt.

A home-equity loan is the best choice when you exactly know how much your purchase is likely to cost and you need several years to pay it off. A line of credit may be a better option for shorter-term borrowing, or when you need to tap your home equity to cover emergencies. Here are some tips to wisely tap home equity tap loans:-

Compare the rates.-The rate you'll be offered on a loan or line of credit depends heavily on your credit score.

Avoid the fees- If you have decent credit, you don't have to pay any application or appraisal fees to borrow against your home

Know what you are risking- A home can be a good way to build long-term wealth. Every dollar of equity you borrow is a dollar that cannot be used to buy your next home when you're ready to trade up, or decided to fund your retirement when you're ready to downsize it.

Never assume that using equity to pay for home improvements or education is always a slam dunk and not all home improvements add value and it's easy to go overboard with student-loan debt, as well. It is totally up to you to set reasonable limits on your borrowing and to make sure that what you're buying is worth the wealth you're committing. Be particular about using home equity to pay off credit cards or other short-term debt. Often you'll just wind up deeper in debt because of not addressing the basic overspending problem that got you into trouble in the first place.

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