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Home Equity Loans

Do you have any idea about home equity loans and how they can help you? These loans are popular loan programs that can be utilized for different purposes. The interest on home equity loans is tax deductible.

About home equity loans

A home equity loan is a specific type of loan where the borrower uses his home equity as security or pledge against the loan. Home equity loans are popular financing options for healthcare expenses, higher education and home improvement. There are many other purposes for which a home equity loan can be used. Under this type of a loan, a lien is formed against the home of the borrower and the actual amount of home equity goes down.

Home equity loans are also known as second trust deeds and second position liens. One of the principal advantages offered by these loans is the interest is allowed for tax deduction. When thinking about a loan, the borrower should be accustomed to the expressions recourse and non recourse loan, dischargeable and nondischargeable debts and secured and unsecured loans. Conventional mortgage loans are normally non recourse loans and a home equity loan is a type of secured loan. It is also a recourse loan for which the borrower is individually accountable. Nonpayment of the loan may lead to foreclosure. The fixed interest rate offered by these loans is the main reason why so many people go for them.

Types of home equity loans

There are basically two types of home equity loans and they are mentioned below:

  1. Open end home equity loans
  2. Closed end home equity loans

Difference between home equity loans and home equity lines of credit

Home equity loans and home equity lines of credit are not similar. There are a number of differences between these two loan options. A home equity loan is a loan with a fixed interest rate where a lump sum amount is offered to the borrower. In contrast, a home equity line of credit is a kind of revolving credit where the interest is payable on the basis of an adjustable rate. In case of a home equity line of credit, the whole amount is not offered to the borrower as a lump sum payment. Borrowers use a line of credit instead to borrow an amount which is not higher than a specific credit limit. This credit limit is similar to the credit limit that is set for a credit card. There is a draw period during which you can borrow HELOC funds. The interest rate on a home equity line of credit is decided on the basis of an index like the prime rate. This indicates that the interest rate might vary with time. There might be a prerequisite for a minimum monthly payment for a HELOC which is frequently an interest only payment.

What are the prerequisites of getting a home equity loan?

In order to become qualified for a home equity loan, you should have an outstanding credit history. The loan to value (LTV) ratio should also be reasonable.

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