Sometimes life hits you with unforeseen expenses and you don't have sufficient funds to cover them. If you're a homeowner, your house may provide the means for getting a loan. Like any loan, you must repay the money borrowed, and pay an additional amount in the form of interest. However, home equity loans have some of the lowest rates around and you may realize some tax benefits at the same time.
Types
Banks offer two main types of home equity loans: conventional, fixed-rate loans and home equity lines of credit (HELOC). Both loans use your home as collateral to secure the loan, but a conventional loan establishes a set interest rate and a predetermined monthly payment. An HELOC allows the borrower to withdraw and repay the money on a flexible schedule during the first phase of the loan.
Size
The amount of a home equity loan depends upon the amount of equity you own in your home. For instance, if your home's fair market value is $150,000 and you still owe the bank $100,000 on your mortgage, your equity is $50,000. Most banks, however, will only loan 80 percent, or less, of a homeowner equity, or $40,000 in this case.
Benefits
Home equity loans often have lower interest rates than unsecured loans or purchases made on credit cards. The homeowner may save money by consolidating high interest debts into a home equity loan and making one monthly payment. In addition, the interest paid on a home equity loan is tax-deductible, offering further savings.
Time Frame
A conventional home equity loan establishes a time line for the life of the loan, for example--15 years. An HELOC features a "draw period" when the homeowner can take out the cash he needs and put it back into the account as he chooses. He will pay interest on the money he withdraws, however. At the end of the draw period, the homeowner will pay back the balance owed to the bank or the bank will convert the home equity line of credit into a conventional home equity loan.
Considerations
A home equity loan is a second mortgage because your home guarantees that you will repay the money. While the approval time for a home equity loan is usually short, only a few days, taking one out for buying personal luxuries that quickly depreciate lowers your investment value in your home. Home equity loans taken to remodel or repair the home may actually add to the homeowner's equity if the value of his home rises substantially.
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