Home Equity Loans, How Do They Work?
Home equity loans, or second mortgages, provide a source of funding for a variety of needs including large purchases, a solution for consolidating credit, or for home improvement projects. The two main types of loans available are a home equity loan and a home equity line of credit. The majority of loans allow a homeowner to borrow up to 80% of the value of their home, although there are plans available that permit 90-100% loan-to-value ratios.
The first option is a fixed installment plan that has a set payment amount and number of years for the term, allowing for simplified monthly budgeting as the payment will not change for the life of the loan. The second option, a line of credit, is a revolving line of credit secured by a mortgage on your property. In most cases, checks will be issued for this type of loan which allows the homeowner to access funds when needed, instead of a lump sum as in the case of the installment loan. Payments may be interest-only for a period, and following the draw period which is the time during which funds can be accessed, fixed payments may be made.
As with first mortgages, there is a possibility that the interest is tax deductible with a second mortgage. If you have significant unsecured debt, it is a worthwhile option to consider a home equity loan. This type of loan can convert various accounts of higher rate debt to a fixed monthly payment. It is necessary however, in the case of consolidating debt, that a budget is created to ensure more debt is not accumulated. Furthermore, by converting unsecured debt to debt secured by a mortgage on your home, the amount of equity available is lessened, which would affect the amount received in the case of a sale.
The interest rate of a second mortgage is likely to be lower than that of credit cards or other unsecured personal loans and will provide funds for school tuition or a vehicle purchase. An installment loan will have a fixed rate, set at the time funds are disbursed, and the credit line will have a variable interest rate, set at a margin above or below an Index. It is best to assess your credit needs in order to determine which product is more suitable for your financial situation.
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Tags: home, home equity, Home Equity Loans, loans, unsecured debt