If you are looking for a way to consolidate debts, make improvements to your home, or finance a college education, you may be considering getting a home equity loan or home equity line of credit. Here is a brief overview of these loans and some unique aspects of each. A home equity loan is a fixed rate loan based on the amount of equity you have in your home. Equity is the the actual value of your home, or in other words, the difference between the market value of your home and the balance remaining on the first mortgage. It's the cash value you'd get from your home if you were to sell it today at full market price, and pay off the remainder of your mortgage with the proceeds. Here is an example: If you have a home worth $200,000, and you have paid off $50,000 of the principal from your first mortgage, you have an equity value of $50,000. Consequently, if you were to apply for an equity loan on this home, you would be able to obtain up to $50,000. Home equity loans are often referred to as second mortgages, and the repayment period is normally ten to fifteen years, in contrast with the 30 year payback schedule offered for most first mortgages. Payback periods and interest rates for home equity loans will vary from lender to lender, so you should research current rates before committing to a specific lender. Another way to get cash from the equity in your home is to obtain a home equity line of credit, or HELOC. Home equity lines of credit are comparable to home equity loans in that you can borrow as much as the total value of your home's equity. The main difference between the two loans is that with a HELOC, you're setting up a revolving line of credit instead of borrowing a fixed amount of money. A home equity line of credit is similar to a credit card and other types of credit line accounts: as you pay off the balance, more money becomes available to borrow. Home equity loans normally have a fixed rate of interest, so locking in a low rate can save you money in the long run. The HELOC however, has a variable interest rate which can change over the life of the loan, causing your payments to fluctuate. With a HELOC, lenders will frequently require a borrower to initially withdraw a minimum amount of money. There may also be minimum requirements for subsequent uses of the line of credit. When drawing on the account, the money will be disbursed either by check, credit card or electronic transfer. Whether you go with a home equity loan or a line of credit, you will have to pay the balance in full if you sell the home. Before setting an asking price on your home, you should take into account this additional expense.
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