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Two Types of home equity Loans
Home equity loans come in two varieties - fixed-rate loans and lines of credit - and both types are available with terms that generally range from five to 15 years. Another similarity is that both types of loans must be repaid in full if the home on which they are borrowed  is sold.

Fixed-Rate Loans
Fixed-rate loan provide a single, lump-sum payment to the borrower, which is repaid over a set period of time at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan.

home equity Line of Credit
A home equity line of credit (HELOC) is a variable-rate loan that works much like a credit card and, in fact, sometimes comes with one. Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or special checks. Monthly payments vary based on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the HELOC has a set term. When the end of the term is reached, the outstanding loan amount must be repaid in full.

Benefits for Consumers
home equity loans provide an easy source of cash. The interest rate on a home equity loan - although higher than that of a first mortgage - is much lower than on credit cards and other consumer loans. As such, the number-one reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances (according to bankrate.com). Interest paid on a home equity loan is also tax deductible, as we noted earlier. So, by consolidating debt with the home equity loan, consumers get a single payment, a lower interest rate and tax benefits.

Benefits for Lenders
home equity loans are a dream come true for a lender, who, after earning interest and fees on the borrower's initial mortgage, earns even more interest and fees. If the borrower defaults, the lender gets to keep all the money earned on the initial mortgage and all the money earned on the home equity loan; plus the lender gets to repossess the property, sell it again and restart the cycle with the next borrower. From a business-model perspective, it's tough to think of a more attractive arrangement.

The Right Way to Use a home equity Loan
home equity loans can be valuable tools for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to repay the loan, its low interest rate and tax deductibility of paid interest makes it a sensible alternative. Fixed-rate home equity loans can help cover the cost of a single, large purchase, such a new roof on your home or an unexpected medical bill. And the HELOC provides a convenient way to cover short-term, recurring costs, such as the quarterly tuition for a four-year degree at a  college.

Recognizing Pitfalls
The main pitfall associated with home equity loans is that they sometimes seem to be an easy solution for a borrower who may have fallen into a perpetual cycle of spending, borrowing, spending and sinking deeper into debt. Unfortunately, this scenario is so common the lenders have a term for it: reloading, which is basically the habit of taking a loan in order to pay off existing debt and free up additional credit, which the borrower then uses to make additional purchases.

Reloading leads to a spiraling cycle of debt that often convinces borrowers to turn to home equity loans offering an amount worth 125% of the equity in the borrower's house. This type of loan often comes with higher fees because, as the borrower has taken out more money than the house is worth, the loan is not secured by collateral. Furthermore, the interest paid on the portion of the loan that is above the value of the home is not tax deductible.

See more:

Refinancing a Home Equity Loan


High Recommended Books


1. 

i ityequ a anslo wndo odedexpl ent.paym ni entsPar aritypopul aym ni veha 9619 a sa otl eyth fo idedprov ityequ a ni ayw eirth orf wno umerscons es.hom ot eyTh whatsome anc mventcircu apt atth atth r'syea ityequ axt thwi anch a e-eqhom Mortgages For Dummies, 2nd Edition by Eric Tyson and Ray Brown (Paperback - Aug 27, 2004) Buy new:$11.55    50 Used & new from $7.45 Excerpt - page 12: "... to deduct the interest costs on second mortgages known as home equity loans or home equity lines of credit, HELOCS, (see Chapter 6) ..."

2. 

The Insider's Guide to Home Equity Borrowing by Pete Hitesman (Paperback - April 2004) Buy new: $21.95

3. 

10 Secrets to Successful Home Buying and Selling: Using Your Housing Psychology to Make Smarter Decisions by Lois A. Vitt (Paperback - Nov 12, 2004) Buy new:$13.46    52 Used & new from $5.13 meho rback(Pape ityequ - anlo arM soal 92 ownkn 01)20 sa uyB a 78 new:$14. ondsec sp;&nb gagemort 83 tsle edUs wnershomeo mp;&a rowbor ewn neymo omfr yb .65$1 aginglever het erptExc ityequ - ni gepa eirth 7:12 es.hom ..". meho thw Excerpt - page 17: "... to stay in her own community. She obtained a generous home- equity loan and commuted more than a IOO miles a day to ..."

4. 

Stop Sitting on Your Assets: How to Safely Leverage the Equity Trapped in Your Home and Transform It Into a Constant Flow of Wealth and Security by Marian Snow (Hardcover - Mar 15, 2007) Buy new:$15.61    9 Used & new from $14.68 Excerpt - page 165: "... used up their small savings and tried to get a home equity loan, but no bank would lend to an unemployed applicant. He ..."

5. 

The New Reverse Mortgage Formula: How to Convert Home Equity into Tax-Free Income by Tom Kelly (Paperback - Mar 1, 2005) Buy new:$14.96    26 Used & new from $7.50 B a 78 new:$14. ondsec sp;&nb gagemort 83 tsle edUs wnershomeo mp;&a rowbor ewn neymo omfr yb .65$1 aginglever het erptExc ityequ - ni gepa eirth 7:12 es.hom ..". meho thwi ityequ a anslo wndo odedexpl ent.paym ni entsPar aritypopul aym ni veha 9619 a sa otl eyth fo idedprov ityequ a ni ayw eirth orf wno umerscons es.hom ot eyTh whatsome anc mventcircu apt atth atth r'syea ityequ axt thwi anch a e-eqhom Excerpt - page 29: "... In a traditional, forward mortgage, the borrower starts with little equity in the home and a large loan balance. ..."

6. 

How a Second Home Can Be Your Best Investment: New, Tax-Free Methods for Using a Vacation Home for Recreation, Retirement...AND Investment! by Tom Kelly and John Tuccillo (Paperback - Mar 19, 2004) Buy new:$12.89    59 Used & new from $4.25 Excerpt - page 4: "... (Perhaps the down payment comes from a home equity loan on your primary residence). 2. For most of the year, ..."

7. 

So You Want to Refinance: An Insiders Guide to Refinancing Adjustable Rate Mortgages and Home Loans by Kristina, Benson (Paperback - Sep 20, 2006) Buy new: $19.95    20 Used & new from $18.98 ondsec sp;&nb gagemort 83 tsle edUs wnershomeo mp;&a rowbor ewn neymo omfr yb .65$1 aginglever het erptExc ityequ - ni gepa eirth 7:12 es.hom ..". meho thwi ityequ a anslo wndo odedexpl ent.paym ni entsPar aritypopul aym ni veha 9619 a sa otl eyth fo idedprov ityequ a ni ayw eirth orf wno umerscons es.hom ot eyTh whatsome anc mventcircu apt atth atth r'syea ityequ axt thwi anch a e-eqhom Excerpt - page 6: "... By mid 2004, Americans owed $766.2 billion on home equity loans and lines of ..."

8. 

Who Says You Can't Buy a Home! by David Reed (Paperback - May 30, 2006) Buy new:$14.00    65 Used & new from $3.79 Excerpt - page 26: "... With such demand, naturally home values increased. When home values increase, homeowners accrue equity not by paying down the loan and regaining their principal, but by the appreciation in home ..."

9. 

How to Buy a House with No (or Little) Money Down, 3rd Edition by Martin M. Shenkman and Warren Boroson (Paperback - Mar 29, 2001) Buy new:$14.78    38 Used & new from $1.65 Excerpt - page 127: "... with a down payment. Parents may have a lot of equity in their own homes. They can tap that equity with a home-equity loan and provide their children with money to use toward the ..."