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Home Equity Loans - Can They Help You?

Cash can be hard to get, at times, and the debt can pile up, but if you own your own home it may be much easier than you think. A home equity loan allows you to take out a loan based on the built up cash value of your home. Here is what you need to look for in order to get a good deal on a home equity loan.

How It Works

A home equity loan is worth the amount of money that you now have invested in your house. For instance, if you house is worth $250,000 on the market, and you still have $155,000 on your existing mortgage, then you have an equity value of the difference - $95,000, in this case. That means that many lenders would be glad to give you a loan worth up to $95,000, as a second mortgage, or home equity loan.

Two Kinds of Mortgages

When you apply for a home equity loan, there are two kinds that you might get. The first kind, called a home equity loan, simply gives you the money - like any other loan. You are free to use the money as you want. The other kind is called a home equity line of credit, often referred to as a HELOC. Both of these are also referred to as second mortgages, since they are secured by the house itself.

The Simple Home Equity Loan

A home equity loan, or second mortgage usually is tax deductible, and is often based on the entire amount of the equity of the home. Generally, it is at a higher rate than the first mortgage, and usually has a maximum of 15 years to pay it back. Many homeowners use a balloon payment with this type of mortgage, or a large payment that is due at the end, in order to keep their payments low.

Line of Credit

This type of home equity mortgage gives to the homeowner a credit line that they are free to draw on - when needed. The ceiling amount is pre-approved by the lender, and then they are free to draw out money as they need it - or if they need it. Up to 100% of the equity value can be borrowed, and interest is only paid on the amount borrowed. The rate of interest, though, will vary, depending on what the rates are at the time you withdraw any money. These loans are generally held open for up to 30 years.

Like with any other loan, you need to take the time to shop around in order to ensure that you get the best deal. Not only should you compare interest rates, but also the various fees that are involved. Separate the actual loan from the fees and compare them other loans - fee against fees and loan costs. Do not make the assumption that since the home equity loan has no closing costs, that they are not in there somewhere - they are.

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