A home equity loan is a loan using a borrower’s house as collateral. If you’re a homeowner who is thinking about making major improvements to your home, or have some sort of a big-ticket item in front of you that you need help paying for, a home equity loan could be the right way to go to get the job done. You may also apply for a home equity line of credit through your loan.
When you, the borrower, take out a home equity loan you’re creating debt for yourself, obviously. That debt comes in the form of a lien on your home. This lien will need to be honored first if, for example, you sell the home but have not yet finished paying off the home equity loan. A lien will also be a factor should you take out any other form of loan using your home as collateral; this is because of the fact that liens automatically reduce the value of the equity you’ve put into your home.
The amount of your home equity loan is determined primarily by your income, credit history, and the value of your home, as determined by appraisal. You can get either a closed-end home equity loan or an open-end loan. A closed-end loan allows you to pay back the loan spread out over time in a process called “amortization.” If you choose to go with a reduced amortization plan – meaning low monthly payments for the duration of the loan – you will be stuck with a final “balloon payment” where you have to come up with a big lump-sum.
An open-ended home equity loan sets a limit on how much you can borrow, based upon the same variables involved in determining a closed-ended loan, but allows you to pay the money back and then borrow more, as you like.
If you’re on the market for a home equity loan, be sure you sit down with your financial advisor or a bank representative to go over all aspects of the loan in as much detail as possible. You need to know what you’re doing when it comes to big financial commitments, especially in these uncertain times.