What Is a Home Equity Loan?

Monday, 27 Dec 2010 11:50 AM

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Mortgage has been a major source of funding for the purchase of homes for a large number of people. But a mortgage might not be sufficient to meet the numerous expenses associated with a new house. Besides, buying a home often depletes the homeowner's coffers, thus leaving no or limited funding for other expenses. In such cases, a home equity loan is a good option that homeowners can tap.
 
With a home equity loan, the borrowers use the equity in the value of the house. It is the difference between the total worth of your home and the overall outstanding payment of the mortgage.
 
There is another way to use the equity in the value of the house, especially if there is no immediate need for a home equity loan. You can take a home equity line of credit and use it as and when you need it. As the name suggests, a home equity line of credit is secured by the equity value of the borrower's home.
 
If you already have a mortgage on your house, the equity value of the home is determined as the difference between the market value of the home and the loan amount secured by the existing mortgage.
 
Most often, people opt for home equity loans for expenses like home improvement or repair work. But the money can also be used to fund several other expenses such as children's education and medical expenses. You must remember that a home equity loan will further reduce your own equity in the house. Home equity loans are secured loans and there is a risk of the lender taking possession of the asset in case of default in loan repayment.
 
It is also important that you be aware of the hidden terms and conditions that are part of the home equity loan offered to you. While lenders might be tripping over each other to give you these secured loans, it is up to you to decide whether you will be able to meet the repayment obligations. Therefore, keep in mind the risks of default and possibility of foreclosure.
 
Nonetheless, home equity loans find many takers for various benefits they bring in. Generally, the home equity loans have a lower interest rate. However, you may have to shop around to get the best offer in terms of rates. A good credit score can also help you get a lower interest rate.

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