Home Equity Loan 101

Posted by Nick Niesen on October 29th, 2010

Times are getting rough these days. Everyday, the saying the money does not grow on trees seems to increase in value. Countless of individuals have grown bankrupt despite the progress economists have been observing. As life continues its course, needs increase as the money required to fill such needs seem to deplete. In such cases when people are faced with financial worries, one common option is borrowing money. There are several types of loans that people can take when they have financial problems, and one of the most common types is the home equity loan.

As its name suggests, a home equity loan is a type of loan that involves a house?s equity as the collateral being used by the borrower. The home equity loan is also sometimes called a second mortgage or an equity loan. Families who in the middle of their mortgage suddenly get a certain financial need find it necessary to borrow money once more. A common use of the money obtained from the loan is for paying medical bills, making major home repairs, and paying for college tuitions.

Some financial institutions call home equity loans as home equity line of credit. This is because the amount of money obtained from the loan is derived from the difference between a home?s present market value and the equity of the homeowner. The home equity loan is sometimes considered as a second chance for borrowers who are having a hard time paying for their mortgage. The danger when the home equity loan is not paid off is that the house may be sold to fill in the balance or remaining debt. The interest rates of home equity loans are usually lower and more flexible than those of credit cards and regular second mortgages.

There are two common types of home equity loans:

The closed-end home equity loan refers to the type of home equity loan wherein a lump sum is given to the borrower when the loan is approved, however, no further loans would be allowed. With this type of home equity loan, a borrower can get up to the entire value of the home assessed, minus any liens. The amortization of closed-end home equity loans can last up to fifteen years with a balloon payment for three, five, or seven years. When the balance for the balloon is matures, the borrower must either pay the remaining balance off, or refinance.

The open home equity loan involves a revolving credit wherein borrowing can happen several times depending on the choice of the borrower. It is also possible to get the entire value of the home for the loan with an open-home equity loan. The amortization may last up to thirty years at a variable interest rate that is rather competitive. One can pay as low as the only the due interest for the month with this type of home equity loan.

Both closed and open home equity loans are referred to as second mortgages because like regular mortgages, such loans are secured against the property value involved. Usually, the terms for home equity loans are shorter in duration compared to traditional mortgages. The good thing about home equity loans is that their interests may be deducted to borrowers? personal income taxes when the right arrangements have been made.

The need for money is a reality of life. The times when money runs out are indeed devastating. Fortunately there are many options to obtain money and one them is getting a home equity loan.