A home equity loan is a type of second mortgage that allows you as a homeowner to borrow money based on the equity that you have accumulated on your home.
There are two kinds of home equity loans: line of credit and fixed-rate loan.
The duration of both types could range from five years to 15 years and the borrower will have to completely repay the loan if he sells his home.
The line of credit type of home equity loan, which is also known as HELOC, functions in the same manner as a credit card and it has a variable interestÂ rate. A certain spending limit is provided for a particular borrower and he may be able to borrow from time to time as long as the limit is not exceeded. The rate applied to compute the monthly payments will depend on prevailing rates.
However, the HELOC has a fixed duration like the fixed-rate type of home equity loans. When this term is completed, the remaining balance of the loan will have to be completely paid.
For the fixed-rate type of home equity loan, a one-time lump sum is given to the borrower. Much like a home mortgage loan, monthly payments are to be made. However, unlike the HELOC, the interest rate applied will remain the same for the term of the loan.
For the borrower, a home equity loan is a good source of cash for an interest rate that is lower compared to that of consumer loans such as credit cards. Thus, one of the reasons that borrowers may have in getting a home equity loan is to pay off the balance in their credit cards to avoid their much higher interest rates.
There is also the benefit that the interest paid may be tax deductible (consult your accountant). The only problem with a home equity loan is that borrower may get into the habit of reloading. This is the practice of paying a particular debt by getting another loan.