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  Category: Articles » Finance » Real Estate » Article

Home equity loan: a smart financial tool

By Nathen Jones

A home equity loan is a loan secured by a person's home. In other words, your home equity is the difference between what you owe on your mortgage (and on any other home loans) and the market value of your home.

Home equity loans allow the owner of the house to borrow money from the bank with the equity in their home as collateral. Home equity loans typically have much lower interest rates than other types of financing, such as credit cards and personal loans.

Home equity loans are secured debts since these loans are debts against an owner's property. However, if the creditors want the owner of the house to pay back the loan, the property can be required to be sold back.

In a home equity loan, one gets a single lump sum payment for the full loan amount to finance a large one time expense, which is required to be paid back over a specific period of time, at a fixed interest rate.

Home equity loans can be obtained as a revolving line of credit or as a lump sum. They can either be a fixed rate mortgage or an adjustable rate mortgage. Home equity loans can be taken for house renovation, college tuition or higher education, for consolidating bills or even starting your own business.

There are two types of home equity loans. A traditional home equity loan is also called a second mortgage and is when a bank lends you a lump sum of money that must then be paid back over time. With this type of home equity loan, interest begins building as soon as the bank issues you the money.

The second type is a home equity line of credit, where a bank gives you a checkbook or credit card to make purchases, which then accrue against your home's equity. With this type of home equity loan, interest does not begin building until you actually make a purchase.

In a home equity loan, the interest rate is usually higher than a regular (also called a first) mortgage. Before opting for any home equity loan it is important to weigh all the aspects and go for the bank which gives the best options. According to the experts, if you find yourself in need of a sum of money, whether it's to renovate your home, purchase a new car or consolidate debt, a home equity can be a very smart financial tool.

About the Author
Nathen Jones, an expert in mortgage loans is an associate editor for The website is an online portal for providing services related to mortgage loans, equity loans and loan calculators. Send your feedback and views at

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  Some other articles by Nathen Jones
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