Home Equity Loan
A home equity loan can be an excellent way to finance major expenses, from home repairs to college tuition. The loan allows the borrower to take advantage of the equity in his or her home by borrowing against it. Consequently, a home equity loan is relatively easy to obtain and can provide a significant amount of cash quickly. Because the loan is secured by the home, it is often referred to as a second mortgage. Provided here is a beginner's guide to the home equity loan.
Closed End
A closed end home equity loan provides a lump sum payout. A loan agreement
is drafted for a single sum of money, which is paid to the borrower at
closing. State laws govern the amount of money that may be borrowed, which
in certain cases may be more than 100% of the equity in the home.
Borrowers must be careful to read and understand the loan agreement. Some closed end home equity loans offer low payments throughout the life of the loan in exchange for a large balloon payment at the end. Never sign a home equity loan agreement without understanding exactly what your responsibilities will be.
Open End
This type of home equity loan is also known as a home equity line of
credit. The line of credit operates similarly to a credit card. A maximum
credit limit is set by the lender at the time of closing, and the borrower
can then borrow money up to that limit, pay it down and borrow again.
A home equity line of credit typically offers a certain number of years during which funds may be borrowed, after which the line of credit closes. A certain number of additional years are then provided to pay off the line of credit. However, terms and restrictions vary widely, so it is important to read and understand the terms of your agreement.
The Bottom Line
A home equity loan can be a wonderful way to provide additional cash flow
for large expenses. However, the interest rate and terms of the agreement
may vary. It is extremely important to shop around for the best product,
and avoid signing anything without fully understanding all of the terms and
conditions.
Because a home equity loan is secured by the home itself, it is important to understand the risks involved. If you fail to make your loan payments, your house could be at risk. Never take on any more home equity debt than you are certain that you can afford.
