Understanding How Home Equity Loans Work

Understanding Home Equity Loans

Loans involve intricate terms and conditions that you have to follow very carefully if you want to get a good deal. Of the secured loans available to homeowners, home equity loan is a good option. To help you better understand home equity loans, here are some basics.

What does equity mean?

Equity can simply be defined as the amount of your share in your home. If you have taken a loan against your home, then equity is calculated as the difference between the total value of the house and your outstanding debt.

Home equity loan or HEL

Home equity loan or HEL is similar to a second mortgage. You can obtain a home equity loan against the equity of your home. The loan is payable in monthly instalments. If you fail to make payments repeatedly, your home may be foreclosed. Foreclosure is the process in which the lender takes possession of your home and has the right to sell it to recoup the money he lent you.

Home equity loans can be availed against fixed properties. Properties used for business purposes or movable properties cannot be used to avail a HEL. Usually, home equity loans are obtained as a single large payment. The interest rates are generally fixed and the repayment duration can be anywhere between 5 years and 15 years.

Difference from and similarity with HELOCs

There is another type of loan that you can take against your home – a HELOC or home equity line of credit. This works similar to a credit card where you are provided with a maximum credit limit. You can withdraw as much money as you want from this and at any time, until the credit limit is reached. Unlike home equity loans, HELOCs have a variable interest rate.
HELOC and HEL are similar only in the fact that both are availed against the equity in your home.

Before taking a home equity loan make sure that you can afford it. Remember that by taking this loan you risk losing your home. Make sure that you opt for affordable monthly repayments. Read the terms and conditions carefully before you sign on the dotted line. Most importantly, take out such a loan only if there is a justifiable need for it. Avoid taking out such a loan for frivolous expenditures like a world tour or to buy an RV. Homeowners generally take out such secured loans to pay for emergency medical treatments, college tuition fees or home renovations.

Speak Your Mind