| A home equity loan is a loan that is secured by the | | | | might mean that the payments are no longer enough |
| equity of the borrower's home. Because the | | | | to cover the interest expense. This would lead to a |
| borrower's home is used as security, the lender will | | | | negative amortization, where the unpaid interest is |
| usually offer an interest rate that is lower than it would | | | | added to the balance. |
| be for an unsecured loan. The most common reasons | | | | A home equity line of credit works like a giant credit |
| for getting a home equity loan are paying for home | | | | card, except that there are minimum withdrawal |
| improvements, paying off other debts that have a | | | | amounts as well as fees for each withdrawal. The |
| higher rate of interest, and paying for other expensive | | | | interest rate on this type is usually variable. Therefore, |
| items such as a college education or medical bills. | | | | the monthly payment amount will change depending on |
| A borrower should only seek a home equity loan if | | | | the current interest rate and the current loan balance. |
| they are sure that they can repay it. If the borrower | | | | Currently, home equity loans are difficult to get unless |
| defaults then the lender could foreclose on the | | | | the borrower has excellent credit and a lot of equity in |
| borrower's home and sell it to recover their losses. A | | | | their home. This is because the home equity loan will |
| borrower must have equity in their home before | | | | be in second position behind the first mortgage, which |
| applying. If the borrower's home is worth less than the | | | | makes it difficult for a lender to recover any money if |
| balance on their current mortgage(s) then there is no | | | | the borrower defaults. However, it is much easier to |
| equity to borrow against. | | | | get if the borrower does not have a first mortgage |
| There are two types of home equity loans - a closed | | | | because the equity loan would then be in first position. |
| end, and a line of credit. A closed end home equity | | | | In that situation a borrower may find it easier to get |
| loan is a lump sum that is repaid in monthly payments | | | | than a traditional mortgage. |
| over five or ten years, and usually has a fixed interest | | | | There is also a tax advantage to getting a home |
| rate. If the rate is fixed then it is easy to create a loan | | | | equity loan. The interest is usually tax deductible if the |
| amortization schedule that shows the balance | | | | borrower's primary residence is the home offered as |
| remaining on the loan after each payment. Variable | | | | security. The borrower should check the tax code or |
| rates are uncommon for this type of loan because the | | | | ask a tax professional for advice if they want to take |
| payments are fixed, so a change in the interest rate | | | | advantage of this tax deduction. |