Understanding home equity loans

A home equity loan is a loan that uses your home as collateral. Your home equity is the part of your home that you actually own and this is the guarantee for your loan.

A home equity loan, sometimes called a second mortgage loan, reduces the amount of money you have paid against your home. If you do not pay your loan you can lose your home

What are the advantages and disadvantages of home equity loans?

Major advantages to home equity loans are the interest rates and tax deductions. Since your home is at stake, there is less risk for the lending company. Since you can be considered to be a low risk then your interest rate can be lower.

With home equity loans the interest that you pay on the first $100,000 is always tax deductible. You should take with your accountant or tax advisor to find out all the information on these types of tax questions. Your accountant may be able to help you in other ways with your home equity loan. The major disadvantage in a home equity loan is that you could lose your home. What you are doing is giving the lending company your home for the loan. If you do not pay your loan the lending company will then be able to keep your home and sell it for the money that you owe them for the loan.

There are also other fees besides interest that must be paid like closing costs, etc.

What types of home equity loans can I find?
There are two types of home equity loans that you hear about the most, they are: standard home equity loan and a home equity line of credit. Cash out refinancing is another of borrowing against your home equity. These three options are explained below.

The Standard Home Equity Loan
A standard home equity loan, or a term loan, a closed-end loan, or a second mortgage loan works just like a normal home loan. You can get a lump sum payment at a fixed interest rate and then you pay the money back in monthly payments until the end of the loan. Your monthly payments will be fixed since the interest rate is fixed. That means that the payment can not be increased.

Home Equity Line of Credit A home equity line of credit works like any other line of credit. What this type of home equity loan does is that you are given a certain amount of money as a loan and then you can draw money from your account as you need it. You only pay interest on the exact amount of money that you borrowed. Usually home equity line of credit loans have a variable interest rate but you can negotiate this with the lending company of your choice.
You can borrow money, the pay it back and re-borrow the same amount of money over and over again with this type of home equity loan.

Cash-out Refinancing
This is not actually a home equity loan, but it does allow you to borrow money against the equity you have in your home. What you do is get a new loan that is more than what you owe on your current mortgage loan, then you pay your current mortgage loan and then the remainder is your new home equity loan. This type of loan does have its advantages. Your interest rates will probably be lower but the closing costs may be higher than the average home equity loan.

Now that you understand what types of home equity loans are available you should be able to choose wisely.