Home equity loans are the loans that are given against a home to the home owners. They are sometimes referred to as second mortgage loans as the loan is given against the already pledged property. The amount that can be borrowed depends upon the equity of the house.
Unexpected expenses always occur in a family. It may be the purchase of new car or renovating the home for baby or a sudden medical expense. Almost every one of us would have come across this situation at some point in time. Tackling these tough situations emotionally can be easy with the help of the family members, but economically only loans can help. Home owners who experience such situations go for home equity loans. Home equity loans are the loans that are given to the homeowners after pledging home as collateral. This loan is also called as second mortgage as the homeowners borrow against the equity of the home.
What is a Home Equity Loan?
Home equity loans are more advantageous to people who need large sums of money. For instance if a person likes to change the office furniture or if he would like to invest in a new machine then getting home equity loan is advantageous. A large sum of money can be granted here as the lender is secured about his repayment. The equity of home is calculated with the difference in the selling price of the home and the debt amount against it. The difference between these two is the equity. For instance if a home is worth £200,000 and if the debt is £100,000 the remaining £100,000 is the equity. If the existing mortgage of £100,000 is fully paid then the equity of home would be £200,000.
Home equity loans are preferred by many people as they allow people to raise large sum of money without having to sell the property. These loans are usually availed to re-model the house or as a debt consolidation loan. Home equity loan is a type of secured loan and is also called as homeowner loan. Home equity loans are of three basic types; Home Equity Line of Credit loans which is also called as HELOC, Second Mortgage Loan and Reverse Mortgage loan.
Home equity loan and second mortgage depends upon the equity of the asset. In second mortgage loan the repayment has to be done over a fixed period of time. The monthly instalments are equal throughout the loan tenure. Line of credit loan is where the borrower only pays an interest to the used money. HELOC also has a set time frame for repayment but works like a credit card. Within the time frame fixed the borrower can draw money using cheque or through special debit cards and electronic transfers. There is minimum amount to withdraw each time and there are also limits for the amount like that of credit card. If the borrower reaches the limit then he cannot borrow further and would need clearance of at least few debts to get credit further. At the end of the loan tenure some lenders do give option to renew the credit line upon repaying the existing credit fully or upon partial repayment. Reverse mortgage loan is where the bank pays that is not required to be repaid throughout the life time. The requirements to avail reverse mortgages are that the person must be above 62 years and should have lived in the mortgage home for at least half of the year or more. Sometimes if there is only some amount left in the first loan then the reverse mortgage will offer some amount so that loans are consolidated. The borrower cannot sell the property without repaying the loan. After the life time of borrower, if the descendants wish to hold the property then they have to repay the loan.