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5 Things You Need To Know About Home Equity Loans

Friday, 04 Mar 2011 03:44 PM

Home Equity Loan
A home equity loan is a type of loan in which the equity in your home is treated as the collateral. These loans are useful for meeting major expenses like those incurred on home repairs, medical bills, or college education. The home equity loan creates a lien on your house, and it proportionately reduces the actual home equity.
Home Equity Loan Types
There are two types of home equity loans; closed end and open end. As they are secured in property like mortgages, both the loans are referred to as second mortgages. In the United States, it is sometimes possible to claim a deduction on the home equity loan interest paid from one's personal income tax. The monthly payment can be as low as the interest due on the loan. Typically, the home equity loan rate is the prime rate plus the margin.
Five Things You Need to Know About Home Equity Loans:
  1. Home equity mortgage loans are usually non-recourse loans. A non-recourse loan/debt is actually a secured loan/debt. The security is typically the property. Home equity loans are secured loans. The debt is secured against the collateral. If the borrower defaults, the creditor takes possession of the assets furnished as collateral, and sells them off. Thus, the creditor recovers the money lent.
  1. When deciding on the loan type, ascertaining whether the loan is dischargeable in bankruptcy in case of bad credit is crucial.  
  1. Borrowing the requisite money on favorable terms with a home equity loan is as good as a refinance home equity loan; you are able to lock in a favorable rate of interest on it.
  1. The interest rate on long-term equity loans is generally higher than that on home equity mortgage loans, even if the prime rate is low. Customers, who took out first mortgages when interest rates were ruling low, may consider fixed home equity loans.
  1. If you are saddled with bad credit, your equity can help secure a lower rate of interest on the loan.

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