Home Equity Credit

Written by Paul Smith

Choosing a Home Equity Loan There are so many different kinds of loans that it can be hard to keep track of them all.  If you need money, you could choose a standard bank loan or use money from a credit card.  While these are acceptable methods, you generally can't get a large amount of money from these.  Not only that, but credit cards will have much higher interest rates than what you can find elsewhere.  Instead of looking for money from these outlets, you could get a loan based on the amount of equity that you have built up on your home.  This is called a home equity loan.  Many people who own homes will use one of these loans at some point in their lives.  This is because they are relatively easy and have few drawbacks.  It works by taking the equity in your home and using it as collateral for a new loan.  They use an easy calculation to determine how much equity you have stored up on your home.  For instance, you may still owe $100,000 for your mortgage loans.  If your house is now worth $150,000, then you have $50,000 of equity.  Home equity loans will let you use all or part of that amount as a loan, which means you will get a lot more money than you would with a credit card or a traditional loan. There are two main types of equity loans; open and closed.  Open home equity loans are also called home equity line of credit, or HELOC for short.  But what is a home equity line of credit?  Home owners can take out money from the loan whenever they wish, as long as it doesn't exceed a set amount.  These loans also have variable interest rates.  This means that they fluctuate throughout the loan.  Some years the rates will be much lower than others will.  Now you know what is a home equity line of credit.  Then there are closed home equity loans.  These are called closed because you can only receive a set amount of money, in the form of a lump sum, from your bank.  This happens on the day of the closing, and you cannot receive any more money through that loan after the fact.  Another difference between closed and open loans is the interest rate.  Closed loans have fixed interest rates.  This can actually be better for you if you happen to lock it in at a low rate.  That means that there will be times where your loan has an interest rate that is much lower than the national average.  While open loans normally last for thirty years, closed loans typically only last for up to fifteen. You need to keep in mind that however much money you take out for this loan, you will lose that amount in equity.  This stays that way until you pay it back.  So, if you had $50,000 in equity, and you borrowed $35,000 with your home equity loan, you will then only have an equity value of $15,000.  If you sell your house shortly afterward, you will find that you won't make as much money as you would have otherwise.  You should keep this in mind.  You might want to avoid getting a home equity loan if you plan to sell soon. As you can see, home equity loans can be a much better choice than a lot of other methods out there.  You will get a large sum of money with lower and more manageable interest rates.  You will also have lower monthly payments than what you would find with credit card debts.

 

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