Home Equity Loan Basics

Getting a home equity loan is not always a straightforward and easily understood process

. In fact, most people are confused by all the legal and financial speak that makes it hard for the common person to understand loan agreements and distinctions. If you feel confused, know that you aren't alone and that there is a solution.

To begin, we'll discuss the basics. The simple answer to, What is a home equity loan? is that this type of loan puts your house up as collateral against the money you are borrowing. While this means the bank could own your house if you don't make your payments, it also means you can use your property to get financial liquidity when you need it.

A loan of any sort is not to be taken lightly. A loan that puts your home at risk if you can't pay it off deserves even more careful consideration and rational thinking. Most financially smart people don't take out a loan against their home unless they have a big expense that is both necessary and otherwise unpayable. The kind of situations that deserve a home equity loan include paying off higher education, medical or home improvement bills.

While you have a loan out against your house, the property value will be deemed less. This is because your house's worth is based on its actual worth minus whatever credit line or loan you have taken out against it. If you plan to sell your home before the loan is up, consider carefully that you will not be getting as much as expected from the sale because the loan brings down the house value.

There are two common types of home equity loan to consider. The safest bet is a fixed term loan because these usually also have fixed interest rates. There is nothing worse than happily making loan payments each month when suddenly your interest rate goes up!

A HELOC, or Home Equity Line Of Credit, however, has an adjustable interest rate. The benefit of this type of loan is that it is a revolving line of credit. This means you can, as needed, dip into a credit line against your house. Though this is an atypical type of loan, the approval requirements are quite similar to those of a regular home equity loan.

Regardless of the type of loan you choose for your situation, the approval requirements are pretty much the same to get the loan or credit line started. You will need to have a decent credit score and information about your house. If you have impressive financial records, you can even borrow the entire worth of your house if need be.

With so much to learn about loans, make sure you do your research before signing away your home. A home equity loan can be a great, solid investment if you go about it knowing what you're doing.

by: Darius

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