What is Home Equity Line of Credit

Written by Paul Smith

Open Versus Closed Home Equity Loans Most people don't realize that there are actually two main types when it comes to a home equity loan.  This means that there are more options for you if you need this kind of money.  But how do you know if you do?  Well, first you need to evaluate your current situation.  If you have a lot of debt, you may decide that you want to consolidate all of those loans by paying them off with another loan.  This can often lower your interest rates and monthly payments over all.  Or, you might be interested in spending money on a big purchase, such as a boat, or the labor and materials for remodeling your home.  Whatever the reason, a home equity loan may be right for you.   Home equity loans aren't for everyone.  Firstly, you'll need to own your own home.  If you don't you can't benefit from this type of loan.  If you do, you still aren't out of the clear.  You will also need to have good or great credit .  While there are banks and lenders that offer these loans to people with bad credit, it is very rare.  You'll find that they have much higher interest rates as well.  Finally, you will need to have built up some equity on your home.  Equity is the value of your home after you subtract what you still owe through your mortgage loans. Calculating your equity can be very easy.  First, you need to know how much your house is worth right now.  This isn't the same as what you bought it for.  To find this number, you will likely need to get your house appraised.  Let's say that the appraiser found that your house was worth $275,000.  You then need to subtract how much you still owe in mortgage loans.  For this house, you still owe $200,000.  That means that you have $75,000.  The bank that uses the calculation to find out how much money they can lend you. There are two different kinds of home equity loans.  You can either get an open equity loan or a closed equity loan.  Closed loans are the most common.  They are called closed because you get a set amount for your loan at the time of the closing.  After closing, you won't be able to get any more money through that loan.  The interest rates are fixed, and these loans generally last no more than fifteen years. Open equity loans are quite a bit different.  They are often called home equity lines of credit because they act as sort of a cross between a regular loan and a credit line.  Instead of getting a fixed amount at closing, you can keep taking out money against this loan.  How often and how much of this loan you take is completely up to you as long as it doesn't go over the cap stated by the bank.  This loan also has variable interest rates and will go for as long as thirty years. When you are looking for one of these equity loans, you should learn about both open and closed loans because your experience will vary based on which one you choose.  As you can see, there is no standard home equity loan.  There are actually two very different types of this loan.  One type may work for some, while the other may be better for others.  That's what makes these differences so great.  Be sure to do your research before you decide on a method.  This way, you will know that you made the right decision and that you will be happy with what you get.

 

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