Home equity loans, also known as a home equity line of credit or a HELOC often called second mortgages, are popular consumer loans in which you borrow money against the equity in your home, with the property as security. Home equity loans and lines of credit are common types of loans. With this product making prompt payments is crucial, as defaulting on a home line of credit can result to an individual losing their home.
Use of Home Equity Loan
A home equity line of credit can be used for a variety of reasons, including debt consolidations and home improvements. Discover how home equity lines of credit can be used to pay off student loans with help from a financial specialist in this free video on home loans and money management. If a bank has credit concerns, it might require more explanation of intended use for a loan.
Types of Home Equity Loans
Home equity loans are lump sum loan distributions, similar to first mortgages, that must be repaid on an amortization schedule (principal and interest). They are most often used for debt consolidation or home improvements, according to Bankrate. Home equity lines of credit (HELOC) are similar to credit cards in that you have open credit access up to your limit. Your risk is greater as your home has an additional property lien.
Risks and Benefits
Inherent risks exist with home equity loans since you are borrowing additional funds against your property. Creditors generally have modest risk. The major benefit of a secured loan is your rates are typically lower than with unsecured debt (like credit cards). This is why home equity loans are often used for debt consolidation.
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