When you own a home, it’s possible to borrow money from the bank against its value without putting up any other collateral than the property itself.
Such loans are called home equity loans or second mortgages and are considered by many to be important financial assets in case of emergencies.
This borrowed money helps to pay off debt, fund other big-ticket purchases, or finance home improvements such as renovations or additions.
Before applying for any home equity loan or line of credit, learn about its benefits and disadvantages. A clear understanding of your options will help you make an informed decision about the best home equity loans for your unique situation.
What Does Home Equity Loan Mean?
A home equity loan is generally a fixed-rate loan, which means the interest rate and monthly payments won’t change. This allows borrowers to make a monthly budget so that they can afford loan payments.
Home equity lines of credit (HELOCs) are another alternative, but they usually come with variable interest rates.
A home equity loan is also termed a second mortgage because it is a second loan taken out on a home. The best home equity loans have a fixed interest rate and offer five to 20 years of repayment terms.
How Do They Work?
A home equity loan is a kind of mortgage secured by the homeowner’s home equity, which is the difference between the appraised value of the home and the mortgage balance.
The best home equity loans have a fixed interest rate and offer a lump sum that they can use.
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Types of Home Equity Loans
Before moving on to home equity loans, let’s look at home equity types. There are usually two types fixed-rate home equity and Home Equity Lines of Credit (HELOCs).
Fixed Rate Home Equity Loan
A home equity loan is usually a fixed sum of money that’s essentially borrowed against your home’s equity. To calculate your home equity, you have to subtract the amount of money you owe on your mortgage from the home’s appraised value.
The rate of interest on a home equity loan is generally fixed, so it won’t change over the life of your loan. This can make budgeting for your monthly payments easier than other types of loans, like credit cards or variable-rate personal loans.
And because your home’s value secures home equity loans, they typically offer lower interest rates than unsecured loans.
Home Equity Lines of Credit (HELOCs)
A HELOC is known for its flexibility in how you use the funds, as you can borrow what you need when you need it. HELOC is generally a line of credit that works similarly to a credit card.
The interest rate levied on HELOCs is variable, but nowadays, some lenders offer fixed interest rates on HELOCs.
Must Read: What are the Different Types of Home Loans in India?
The Benefits of Using Home Equity Loans
- Home equity loans provide cash to finance home improvements, consolidate debt, or pay for other major expenses
- With a home equity loan, borrowers can borrow against the value of their home and use that money for whatever they need
- Unlike other types of loans, home equity loan rates are typically lower because the home secures them
- Another advantage of best home equity loans is they offer longer repayment terms
- Another plus is that borrowers may get a larger loan amount than they could with another type of loan
Benefits of Home Equity Line of Credit
- HELOC is a revolving credit facility that allows borrowers to take out the desired amount of money
- It is best if homeowners make payments in stages, they will always have access to a certain part of the total amount borrowed
- Interest will be levied only on the sum borrowed
Those with a home of their own can avail of a home equity loan to meet any financial needs. It doesn’t require any other collateral. And the loan is also approved more easily and quickly.
Also Read: Travel to Top 7 Destinations with a Personal Loan
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