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Understanding Home Equity Loans
By Steve John
For those homeowners who are in need of consolidating their bills, taking out cash for home improvements, or for paying the pricey tuitions that go along with sending their kids to college, a home equity loan is a viable option to the hassle of refinancing your home. This is especially true for those with an already great rate and good terms on their first mortgage.
Quite simply put, a home equity loan is a lump sum of money that is borrowed by a homeowner and secured by the equity of their residence, just as a first mortgage does. The difference is that the home equity loan (also known as a second mortgage) is in second position on the deed of your property's title, as your first mortgage retains the first spot.
Home equity loans usually contain tax deductible, fixed or adjustable interest rates and a set monthly payment scheduled for 10, 15, or 20 years, depending on your terms. Cash is allocated to the borrower at the time of the loans closing (or funding) for the necessary disbursement. A set amortization schedule reflects the new loan's repayment plan to its lending institution.
Even though the interest paid on a home equity loan is higher than that of a first mortgage, they are still much less expensive than the average credit card and/or unsecured loan. By consolidating all of these higher interest rate payments into one central loan, borrowers can enjoy a lower monthly payment each month, plus a happier bank account when tax time rolls around.
Reasoning behind the higher interest rates of home equity loans compared to first mortgages ranges to dabble in a bit of everything. First, since this loan is listed as second on a home's lien, the lender will have a more difficult time recouping any losses should the house lose value and fall into foreclosure. Secondly, the length of time usually associated with such a loan is much less than a first, so there is substantially less time to collect the payable interest.
Another type of home equity loan is called the Home Equity Line of Credit (HELOC), which allows a borrower to draw cash out whenever they wish, for whatever they wish (up to the preset limit). When the money is paid back, the amount of the HELOC is again where it started, ready and waiting to be used again. It's much like a credit card (with significantly lower rates) and the flexibility to only pay interest for the amount taken out of the credit line for a pre-designated period of time. Annual fees may be assessed for this ultimate convenience, as well as higher interest rates than the more traditional home equity loan or second mortgage.
About the Author
Steve John recommends that you visit http://www.bdnationwidemortgage.com/ for more information on home equity loans.
Article Source: http://www.simplysearch4it.com/article/31541.html
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